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Food Fight - Heinz Vs. Smucker

Posted: Nov 24, 2008 08:14 AM by James Brumley

Tickers in this Article: HNZ, KFT, PG, SJM

So let me get this straight - HJ Heinz (NYSE:HNZ) increases its quarterly profit by 21%, and the stocks falls into the red. The J.M. Smucker Company (NYSE:SJM) increases earnings by 8%, and the stock rallies sharply. Were it, say, a tech company and a financial company, then I could understand the disparate reaction, but Heinz products and Smucker products are in the same aisle at your local grocer! How different can the companies be?

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Actually, aside from both earnings reports deserving a closer look, the polar-opposite responses from their respective stocks is a lesson in its own right. There's always more to the story. Heinz ended up closing Friday at up 4.1% and Smucker up 15.1% after a late day rally in the markets.

Smucker
J.M. Smucker's earnings per share of 92 cents is pretty impressive - an 8.0% increase. It would have been $1.02 per share, had it not been for some restructuring charges associated with the purchase of Procter & Gamble's (NYSE:PG) Folgers brand coffee division.

However, even more compelling is the 19% improvement in quarterly revenue. All told, the company earned $51.5 million on $843.1 million in sales.

But do those numbers justify a big jump in the stock's price? Perhaps, but it likely has more to do with the expectation. Analysts were only forecasting earnings (exclusive of any one-time expenses) at $1.01. That one cent "beat" meant a few dollars worth of gains for each share, though a strong outlook for the remainder of their fiscal year certainly didn't hurt. The company's still looking for earnings of $3.45-3.50 per share, which is in line with third-party estimates. (Explore the controversies surrounding companies commenting on their forward- looking expectations, read Can Earnings Guidance Accurately Predict The Future?)

Heinz
HM Heinz was able to push its bottom line higher by 22%, by earning $276.7 million this time around versus $227 million in the same quarter a year ago. The difference on a per-share basis was 16 cents: 87 cents this quarter, versus 71 cents in the last year's comparable quarter. Analysts were only looking earnings of 74 cents, which the company clearly topped.

However, the fine print makes those numbers not quite as compelling.

Of the $276 million Heinz pocketed last quarter, $92 million of it stemmed from currency hedging. That's fine, but if you take that amount out of the equation, Heinz would have actually posted a decrease in earnings.

Considering sales were up 3.5% for the quarter, yet profits would have been down had it not been for the currency hedge, the selloff makes sense. (Learn all about examining financial reports in our comprehensive Financial Statements Tutorial.)

And The Winner Is?
So, Smucker wins this food fight hands-down, right? Not so fast. As was mentioned above (and somewhat unfortunately), earnings "success" is too often about last year's comparables and this year's expectations. What if, however, those estimates and comparables are off base?

Last quarter, even with the effect of the currency hedging removed, Heinz's net margin was 7.0%. Its trailing-twelve-month margin is 8.3%. Smucker, on the other hand, generated margins of 6.6% last quarter, factoring in one-time items. Smucker's twelve-month net profit margin is 6.5%. In other words, its margins were less than that of Heinz for both time frames.

By the way, in terms of margins and value, very few stocks in the group can consistently compare to Kraft Foods (NYSE:KFT). Last quarter, Kraft's net margin was a whopping 14%, and its trailing price-to-earnings multiple of 12 is near the top in the industry. That hasn't helped the stock much recently, but all stocks are eventually valued correctly.

Bottom Line
It may seem like a minimal difference with the numbers laid out like this, but it's a big disparity in the right context; Heinz was technically 27% more profitable than Smucker over the last year, at least in percentage terms.

Point being, don't be too excited about Smucker's surge, or too discouraged by Heinz's pullback. Eventually, each company will have to justify its price-to-earnings ratio which is at 14 for both.

By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.

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