H.J. Heinz Co. - Growth & Income

Shares of H.J. Heinz Co (HNZ) are near a 52-week high as the company continues to benefit from the booming middle class in emerging markets.

The company recently reported a solid first quarter marked by strong sales growth and an expanding gross margin. Analysts have been revising estimates higher as a result, propelling the stock to a Zacks #2 Rank (Buy).

Although known mostly for its ketchup and various sauces, 56% of sales come from products other than ketchup and sauces, such as meals, snacks, and infant nutrition. The company owns such brands as Bagel Bites, Smart Ones, Ore-Ida, and Heinz Baby Food.

Additionally, over 60% of sales come from outside the U.S.

First Quarter 2011 Results

Heinz recently reported first quarter 2011 earnings per share of $0.75, in-line with the Zacks Consensus Estimate. It was a 10% increase from the same quarter last year.

Total sales increased 1.6%, marked by 3.6% growth in organic sales. This marked the 21st consecutive quarter of organic sales growth.

Emerging markets accounted for 17.8% of total sales and saw organic sales growth of 21.9%.

The gross margin expanded from 35.7% to 36.6% in the quarter, as higher volume, pricing, and productivity enhancements more than offset higher commodity costs.

Outlook

For fiscal year 2011, the company expects earnings per share growth of 7% to 10% on sales growth of 3% to 4%.

The Zacks Consensus Estimate for 2011 is on the low-end of guidance at $3.06, which represents 7% EPS growth over 2010. The 2012 estimate is currently 9% higher at $3.34.

Dividend

Heinz offers an attractive 3.7% dividend yield.

The company did cut its dividend in 2003, but since then has increased it a compound annual rate of 7.3%.

Its payout ratio is a bit on the high side at 61%. Heinz produces strong and stable free cash flow, however, so it is not a big concern yet.

Valuation

Heinz trades at 16.0x forward earnings, a slight premium to the peer group average of 15.0x.

Its price to free cash flow multiple of 14.3 is slightly below the industry average of 14.6.

Heinz is a Zacks #2 Rank (Buy) stock.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

 
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