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. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  9. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  10. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center