Neutral on H.J. Heinz Co. - Analyst Blog

We recently reiterated our Neutral recommendation on H.J. Heinz Co. (HNZ).

Heinz reported an EPS of 78 cents per share for the second quarter of fiscal 2011, beating the Zacks Consensus Estimate of 76 cents. The EPS was also 2.6% up compared to 76 cents in the year-ago period. Revenues were $2.61 billion, down 1.2% compared with the year-ago quarter's $2.64 billion, but missed the Zacks Consensus Estimate of $2.66 billion.

Heinz's growth in domestic businesses, strengthening international operations, focused resource allocation, and management's efforts on balance sheet management lend the much required optimism to the company's outlook. Management is also strongly focused on the top 15 brands, which hold strong market positions and represent nearly 70% of total sales.

The company's operations in the international markets have been instrumental to growth. Heinz generates nearly 60% of sales from markets outside the U.S. The Asia-Pacific segment has been a source of major strength. Volume growth has been particularly strong in China, and New Zealand (Wattie's), with the two leveraging new product launches for growth.

The focus on developing markets is also paying off in India, China, Indonesia, Poland and Russia with strong volume and sales growth.Also, the company has acquired the license from Cadbury Schweppes for the Cottee's and Rose's premium brands of jellies, jams, and toppings business in Australia and New Zealand. Management expects these brands to add 5% to the top-line.

With a strong cash balance, Heinz is well placed to expand its product portfolio and target new territories. During the second quarter of fiscal 2011, the company generated strong free cash flow of $296 million.

However, Pittsburg, Pennsylvania, based the H. J. Heinz Company operates in the highly competitive food industry and experiences worldwide competition in all of its principal products. This often forces the company to reduce its pricing, increasing marketing or other expenditures which in turn may have a material adverse effect on its profitability.

Moreover, mounting competition, primarily from private labels, is creating pricing pressure across all product lines. The primary competitors include Sara Lee Corp. (SLE), Conagra Foods (CAG) and Campbell Soup Company (CPB).

 
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