Trading Heinz Into Earnings

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While H.J. Heinz (NYSE: HNZ) is one of the least sexy names available in any industry, the company is very well positioned. Heinz is scheduled to release earnings results for the most recent quarter on Tuesday, Nov. 20, before the opening bell. Results are expected to be a steady $0.83 per share, demonstrating the ketchup maker’s ability to consistently deliver returns. The combination of the company’s market share, steady growth and attractive dividend yield make the stock a buy for your core portfolio. Heading into earnings is an attractive time to buy as a beat could be the catalyst needed to take the stock to a new 52-week high and beyond.

By the Numbers

The consensus analyst estimate is for earnings of $0.83 per share on revenues of $2.89 billion. These figures represent modest year-over-year growth from the $0.78 per share the company earned in the same quarter a year ago on revenues of $2.85 billion. While these numbers are not the stuff of pandemonium, few companies have delivered the steady, plodding performance of Heinz over the last few years. Looking at the chart below, you can see that since early 2009, Heinz has marched consistently higher.

In addition to solid price appreciation, Heinz carries a dividend yield of 3.5% that is extremely appealing in the current low interest rate environment. At a time in which treasuries continue to offer less than 2% rates, and yield is very hard to find, a stock that can return nearly 80% in two years and offer an attractive yield is rare. Based on the dividend yield and the company’s stability, the stock is a buy; the available price appreciation is a bonus.

While competitors like Campbell Soup (NYSE: CPB) and ConAgra Foods (NYSE: CAG) offer similar dividends – 3.2% and 3.6% respectively – neither stock has Heinz’s stability. Campbell’s does have a slightly more attractive P/E at 15.2 relative to 19.6 for Heinz and 18.4 for ConAgra, but the stability of Heinz justifies its valuation. All three of these stocks look interesting under current conditions, but Heinz is the strongest.

Consistency and Market Share Drive Sales

An important part of the company’s success is its significant market share and international growth. Heinz commands market share of the ketchup market of 60% in the U.S., 70% in Canada and 78% in the U.K. Beyond ketchup, the company’s top 15 products account for roughly 70% of its revenue, although new products have allowed the company to maintain a measure of growth that is driving the stock’s return; sales revenue is up 9% in 2012.

On the international stage, non-U.S. sales now account for roughly two thirds of revenue, demonstrating the company’s skill in managing its brand on a global basis. Significant overseas investments, as well as strong brand identification have been the primary drivers of success. To put the numbers into some perspective, the company sells roughly two single-servings packages of ketchup each year for every human being on the planet.

Risk Factors

The two primary risk factors are resistance at the stock’s current 52-week high and the changing tax treatment of dividends. Without bringing true technical analysis into the discussion, there is a psychological barrier created at or around a stock’s high. The stock is currently trading just below this high, but a strong report on Tuesday could be the needed catalyst for breaking this level.

The other factor to consider is the changing tax treatment that dividends will receive as a part of the fiscal cliff. With a higher tax rate, there has been some speculation that there will be a shift out of high dividend stocks. While monitoring evidence of such a rotation is prudent, with yields remaining so low, dividends remain an attractive source of return, even if a higher tax rate cuts into that appeal.

The Trade

Ahead of Tuesday’s announcement, Heinz is a buy for your core portfolio. A major downward surprise is unlikely, and a beat may drive the stock past the current 52-week high and beyond. The combination of income, stability and price appreciation make Heinz very attractive at current levels.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend H.J. Heinz Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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