Tickers in this Article: HNZ, K, NSRGY, CAG, TSN, KFT, UL, GIS
With institutional investors so skittish these days, it is hard to find cheap stocks among the lists of quality defensive names. H.J. Heinz (NYSE: HNZ), for example, is a company with attractive international exposure, good growth prospects and respectable returns on capital. Yet, the stock always seems to hover just around fairly valued and rarely offers investors a real bargain or a chance to get in on the cheap. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Somewhat Disappointing Second Quarter
Heinz did not do especially well this quarter, though that has to be considered in the context of a company that seldom disappoints or offers many surprises. Revenue rose 8% as reported, coming in around $100 million short of the average Wall Street guess. Organic sales was a less-impressive 1.5%, however, as modest price growth was offset by volume erosion.

Profitability was more problematic. Even with higher prices, Heinz saw about 10% inflation in its core inputs, and adjusted gross margin fell nearly two points. Operating income was, likewise, quite weak. Where the average analyst estimate called for modest growth, operating income, excluding charges, dropped about 5% and margins contracted nearly two points. (To know more about income statement, read: Understanding The Income Statement.)

Will The Efficiency Program Help?
Cost-cutting initiatives are still quite popular with investors, and Heinz is in the middle of its own. As is often the case, these moves include closing factories and firing workers. While this very well may improve margins and returns on capitals, management needs to be careful. Kellogg (NYSE: K) very recently highlighted the risks here; the company went too far and too deep with its cuts and now finds that its efficiency drive has, in some cases, made the company less efficient and will have to add costs back into the system.

Market Share - Frozen Looking Pretty Cool
The top 15 brands at Heinz did fairly well this quarter, with 3% overall organic growth, and the ketchup business delivered a strong 6.5% organic growth. This isn't the only area where Heinz has been strong. Heinz is not a huge player in frozen food, with less than 10% share, versus Nestle's (OTCBB: NSRGY) one-quarter share, but it seems to be doing quite well. While Nestle and ConAgra (NYSE: CAG) have been aggressive on price and have seen volume decline, Heinz and Tyson (NYSE: TSN) seem to be picking up quite a bit of volume growth.

In response to increasing food costs, Heinz is trying an interesting merchandising option. The company will be rolling out a line of products at psychologically desirable price points, largely below $1.99. Although offering more stock keeping units (SKU) can be problematic for achieving ideal margins, it could lead to defensible volume growth for the company, at the expense of companies like ConAgra and Kraft (NYSE: KFT).

Heinz Knows Global Is Where To Be
Heinz is doing a good job of generating more and more of its sales outside the U.S., both through organic brand growth and select acquisitions, in key markets like China and Brazil. Every company from Unilever (NYSE: UL) to General Mills (NYSE: GIS) wants more global growth and understands that it is key to be prominent in the shopping carts in faster-growing economies, but not everybody can succeed. So far, Heinz is seeing strong growth here and this could well be a differentiating factor in its long term success.

The Bottom Line
As said in the intro, Heinz is seldom cheap and today is no exception. This is a fine company that pays a decent dividend and should have fairly predictable earnings growth, over the long haul. What it really lacks right now, is that margin of safety that value and GARP investors typically require. If investors react badly to this recent quarter and the stock slides 10% or so, maybe it starts creeping into that buy range, but it, frankly, looks like more of a hold right now. (For additional reading, check out: 5 Must- Have Metrics For Value Investors.)

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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