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Unpacking Heinz Earnings

Posted: Mar 03, 2010 08:41 AM by Greg Sushinsky

Tickers in this Article: CPB, GIS, HNZ, K, KFT

Ketchup maker and food packager H.J. Heinz (NYSE:HNZ) reported third-quarter earnings which showed a sales increase but a profit decline. Excluding sales of two frozen food business units, Heinz would have increased its net income.

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A Closer Look
What's fascinating is the way the investment community reacts to earnings reports. While some thought the Heinz report was positive, others reacted highly negatively to it. First, a look at the numbers. Sales were up to $2.68 billion from $2.38 billion, while net income was $228.5, or 72 cents a share, off from last year's $242.5 million, or 76 cents. Excluding the charges for the sales of the two food businesses, earnings would have been 83 cents.

Highlights and Concerns
Sales boomed in Asia, up 41%, while sales increased in Europe by 12%. North American consumer product sales increased 7%, while total U.S. volume rose 4%. U.S. sales, however, had been falling much of the past year. Heinz's aggressive promoting, which included coupons for consumers, advertising campaigns and co-branding initiatives, helped boost U.S. revenue. So what's not to like about these numbers?

Some critics pointed out the revenue numbers look better because of poor corporate performance of previous periods. Last year's sales were off by 7.5%, so for critics the increase this quarter simply has a cosmetic look. Also, total sales volume was only up just over 1%. The food service business was also lousy, with many consumers turning to cheap alternatives. Restaurants have been dragging along in the economy, but the real irritant for some was the failure of Heinz to provide a full turnaround from the bearish overall food service performance. Organic sales, which would exclude currency fluctuations, were up 3%; again, critics considered this lackluster. Are these criticisms fair? There is validity to the concerns, yet we feel the severe judgments on Heinz's performance are too harsh.

Other food packagers, such as Campbell Soup Co. (NYSE:CPB), which recently reported earnings up 11%, received a similarly mixed reaction. Although the company posted a revenue increase of 1%, U.S. sales were down by 8%. On the other hand, General Mills (NYSE:GIS) blasted through its latest quarter with a 13% earnings per share increase, while fellow cereal maker Kellogg (NYSE:K) remained flat. Behemoth food conglomerate Kraft (NYSE:KFT) will have to try to get going again after digesting Cadbury. It's easy to see results and prospects in the food packaging industry are mixed, but critics should remember the economy still has a lot to do with this.

Heinz in the Next Year
Heinz gave guidance for $2.82 to $2.85 EPS for the coming year, right about where analysts expected. Heinz dramatically increased its free cash flow by 88% to $439 million in the quarter. Along with its strong performance overseas, as well as its relatively good U.S. results, this bodes well for the company going forward. The mix of new products added to its already diverse product portfolio sets Heinz up well beyond the recession.

Despite much of the lukewarm response to the earnings report, the stock remains near its 52-week high. The recession has been a bit rough on Heinz and the other food packagers, but Heinz is still a solid company and a worthwhile stock.  (Trim the fat from your grocery bill to reduce the impact of food cost on your budget. For more information, read 22 Ways To Fight Rising Food Prices.)

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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