I really try not to fall into the Wall Street trap of always looking for something to complain about when looking at companies. To that end, I think Heinz (NYSE:HNZ) ought to get its due for its strong emerging markets position, its valuable market-leading brands and its ability to maintain respectable volumes in North America. Nevertheless, while Heinz is a solid enough long-term dividend play, I do believe that the company has to wring more profits from its sales for the stock to be worth substantially more than today's level.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Respectable Start to the Fiscal Year
By and large, Heinz got the fiscal year off to a good start. While the bottom line performance wasn't quite as strong as it may first seem, the company is doing reasonably well despite some pressures in its large frozen foods business. Revenue dropped 2% as reported, but rose almost 5% organically on an even split between volume and price. Heinz's top brands fared relatively better (up almost 6% organically), while emerging markets continue to provide strong growth (19% organic). Oddly enough, Heinz's North American results were the weakest on an organic basis; up just 1% as the company held back from substantial price hikes.

Margins were OK, but not spectacular. Gross margin rose 10 basis points on an adjusted basis, while reported adjusted operating income was basically flat. While currency-adjusted operating income did rise about 5%, that still is not much incremental margin leverage. All in all, while the company reported a seven cents beat, five cents of that came from a lower tax rate.

SEE: A Look At Corporate Profit Margins

International Still a Driver
Relative to food giants like Kraft (Nasdaq:KFT), Unilever (NYSE:UL) and Nestle (OTC:NSRGF), Heinz compares pretty favorably in terms of its international exposure, particularly in emerging markets. Unfortunately, while Heinz does provide an above-average level of financial detail, it doesn't give quite enough information to back up how much of its emerging market growth is due to the fast-growing infant nutrition market; a market where companies like Nestle, Mead Johnson (NYSE:MJN) and Danone are seeing significant growth.

Either way, Heinz is building and supporting a business that could pay rich dividends down the road. The company is giving more ad support to its Quero brand in Brazil and piggybacking that with more product introductions and promotions for sauces like ketchup in Brazil. While that costs dollars (and margins) today, it could establish a moat that rivals like ConAgra (NYSE:CAG) will struggle to cross later.

SEE: Investing In Brazil 101

Frozen Still Needs Fixing
Frozen foods remains a good news-bad news situation for Heinz. The bad news is that Heinz continues to see volume erosion, even when adjusting for discontinued lines (like some TGI Friday's products). The good news, such as it is, is that the category as a whole is pretty weak and while ConAgra and Tyson (NYSE:TSN) are outperforming Heinz, they're not really running away with the market. I do wonder, though, about Heinz's long-term plans. While Heinz seems content to get smaller, ConAgra and Tyson seem to be going the other way - with ConAgra recently buying Unilever's North American frozen meals business and Tyson continuing to develop additional frozen packaged food offerings.

SEE: 10 Tips For The Successful Long-Term Investor

The Bottom Line
From a quality perspective, I like Heinz just fine. Moreover, I think the company's focus on emerging markets is going to pay off down the road as there's simply more growth potential in emerging markets packaged food sales than in North America. All of that said, Heinz is no undiscovered stock and the stock's multiples reflect this. Free cash flow growth of 5 to 6% suggests a fair value in the high $50s - a target that is arguably good enough to make Heinz a hold for long-term investors (particularly those looking for decent dividend growth names), but not really very compelling for new investors looking for undervalued names to buy.

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

Related Articles
  1. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  3. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  4. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  5. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  6. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  7. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  8. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  9. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  10. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!