I tend to believe that Wall Street overvalues the supposed stability of packaged/branded food and beverage companies, which is why investors seldom have the chance to buy the stocks of Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP) or Kellogg (NYSE:K) at really compelling valuations. Within the broader group of expensive food names, I can see an argument for owning Heinz (NYSE:HNZ) today. Not only is Heinz doing relatively well from an organic growth standpoint, but the combination of strong brands in developed markets and a very good presence in emerging markets is compelling to me.

Applying The MACD Indicator With MetaTrader 4: How to use MetaTrader 4, a trading platform used for online trading in the forex, CFD and futures markets.

Fiscal Second Quarter Performance on Target
Heinz Q2 results came in as expected at the sales and margin lines this quarter. While some analysts are likely to make something of the company's weak organic growth in developed markets, a quick look around the comparables suggests that even "meh" results are nothing out of the ordinary today.

Revenue fell a bit as reported, while organic revenue rose a little more than 3% this quarter. Volume contributed to about 40% of the growth, with price action kicking in the rest. North America Consumer revenue was basically flat as reported, but would have been up about 4% excluding the TGIF business. U.S. Foodservice was down a bit, while Europe was down more than 4% (flat organically) and Asia-Pacific rose more than 2%.

Heinz did as expected on margins. Gross margin improved about a half-point, while operating income fell almost 1%. While operating income would have been up a bit in constant currency terms, profits in the North America Consumer business weren't scintillating.

Great Emerging Market Growth Is not a Bad Thing
In reading some of the analyst reports on Heinz's quarter, you would almost think that the company's strong emerging market performance is somehow shameful. Emerging market revenue was up about 13% this quarter, with good results in Brazil and China and double-digit growth in Russia. It's also worth noting that emerging market revenue is very nearly one-quarter of the total, making Heinz one of the most heavily-weighted U.S. food companies to emerging markets.

I fail to see how or why this is a bad thing. Yes, Heinz's developed market growth was sub-1% this quarter, but that's not exactly out of step with what we've seen from companies such as Campbell Soup (NYSE:CPB), Smucker (NYSE:SJM) or General Mills (NYSE:GIS). What's more, it's only going to get harder for companies such as ConAgra (NYSE:CAG) and General Mills to break into emerging markets and take on local players as well as earlier arrivals such as Heinz and Unilever (NYSE:UL). Considering that population and disposable income growth is likely to be higher in these emerging markets in the coming decade(s), I find this strong sales growth to be an encouraging sign.

Is the Marketing Landscape Changing?
Heinz is seeing decent volume growth, and better overall organic growth than many other food companies (for example, Campbell Soup, Smucker, and Kellogg). Nevertheless, management is looking to shift some of its promotional dollars away from traditional ad spending and towards discounts and allowances.

We've heard much the same from Campbell Soup and Smucker recently, so Heinz is hardly unusual in this regard. I suspect some of this may be motivated by a desire to stimulate volume through price, without actually cutting prices.

The Bottom Line
I like the fact that Heinz continues to invest in opportunities such as condiments and sauces in Brazil and China and baby food in Mexico. While I find the company's decision to shift its promotional spending towards discounts and allowances to be curious, we'll soon see how this plays out.

The stock of Heinz is still not cheap; a mid-single digit free cash flow growth assumption points to a fair value more or less in line with the price today. While Heinz may not be bargain-priced, it offers a good dividend and good emerging market growth potential, and aside from perhaps Kellogg I think Heinz would probably be my choice of an admittedly uninspiring (from a valuation perspective) sector.

At the time of writing, Stephen D. Simpson did not own any shares in any company 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 News

    The UAE: An Emerging Economy for Investors

    The learning from UAE on how it succeeded with timely diversification when the BRICS nations and the neighboring oil-rich economies faced challenges.
  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. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  9. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  10. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  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 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 >>
  3. 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 >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center