H.J. HEINZ CO. $49 (New York symbol HNZ; Income Portfolio, Consumer sector; Shares outstanding: 318.3 million; Market cap: $15.6 billion; Price-to-sales ratio: 1.5; Dividend yield: 3.7%; WSSF Rating: Above Average) makes a wide variety of processed foods, including condiments, sauces, soups, baked beans, pastas and infant food. Its flagship product, Heinz Ketchup, accounts for about 60% of U.S. ketchup sales.
The company continues to expand its main brands, including Ore-Ida (frozen potatoes), Classico (pasta sauces) and Weight Watchers (diet foods). Heinz’s 15 top-selling brands each generate annual sales of over $100 million. Together, they supply 70% of Heinz’s total sales.
Heinz’s sales rose 21.4%, from $8.6 billion in 2006 to $10.5 billion in 2010 (fiscal years end April 30).
Earnings rose from $2.18 a share (a total of $750.2 million) in 2006 to $2.90 a share (or $923.1 million) in 2009. Earnings fell to $2.87 a share (or $914.5 million) in 2010, because unfavourable foreign-exchange rates cut earnings by $0.29 a share. Without exchangerate changes, earnings per share would have risen 9.3%.
Heinz plans to cut costs by a total of $1 billion over the next five years. It aims to achieve this by improving productivity, including installing uniform computer systems. It will also buy more raw materials in bulk.
The savings from this plan will help Heinz absorb rising costs for ingredients, including wheat and corn. The savings will also help pay for the company’s push into China and other fast-growing markets. Right now, these markets account for 15% of Heinz’s sales. The company aims to raise this to 25% by 2016, and eventually to 35% to 40%.
Part of the company’s growth strategy involves buying food companies in overseas markets. For example, Heinz recently agreed to pay $165 million for privately held Foodstar, a leading soy sauce maker in China. Heinz is also developing new products for these markets, including an infant formula that it will soon launch in China and Russia.
Higher ad spending should boost sales
Heinz also aims to spur sales by spending more to promote its products. In 2010, it spent $375.8 million on advertising, up 24.0% from $303.1 million in 2009.
The company’s strong balance sheet will support its expansion. Its total debt of $4.5 billion is a manageable 29% of its market cap. Heinz holds cash of $494.5 million, or $1.55 a share.
Heinz will probably earn $3.06 a share in fiscal 2011. The stock trades at 16.0 times that figure. The company continues to raise its dividend annually. The current rate of $1.80 a share yields 3.7%.
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