Heinz Bucks the Trend
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On a day when it seemed the industry as a whole had nothing good to share with investors, along comes Heinz (NYSE: HNZ). An increase in revenues quarter-over-quarter translated to a nearly 5% jump in profit – not bad at all, especially when you look at what some of the other companies in the sector were grumbling about while HNZ was sharing the good news.
The nearly 4% increase in share price today is great for HNZ investors and what makes it better is it’s warranted. Even at current multiples -- which aren’t necessarily cheap -- this remains a sound investment. And to add insult to injury -- at least for the competition -- Heinz management went on to add they’re expecting higher than expected earnings for 2012.
At the same time HNZ was making already giddy investors even more so, companies like General Mills (NYSE: GIS) and Campbell’s (NYSE: CPB) were apologizing for not being able to overcome weak sales here in the states. Heinz saw a slight decrease in domestic sales too but the company was able to absorb that with outstanding results in emerging markets. GIS? CPB? Not so much.
Higher commodity prices for all food makers has been a reality this past year – no getting around that. But the inability to atone for that reality is costing General Mills in particular. Management’s recent downward guidance for both the quarter and year-over-year initiated a strong sell off. This was especially troubling for GIS because it comes on the heels of a nearly 30% drop in earnings last quarter.
Campbell’s has done a better job of spinning what can only be described as a poor quarter. Lower sales volume and a significant decline in earnings hasn’t fazed investors today as the stock continues to rise. Higher profits in the soup business may be the catalyst, but an overall drop in sales and a 14% drop in profits overshadows that – or should. CEO Denise Morrison also mentioned an increase in marketing costs as the company returns to its roots. It certainly had an impact on margins, as did the aforementioned commodity costs. Even though CPB is one of the cheapest stocks in the industry trading at just under 14 times earnings, it will be a while before the shift in focus and higher costs translate to an improvement in the bottom line.
At 18 times earnings, Heinz isn’t going to jump out to the value investor. That’s right around the average for the industry and is just about right. But if management’s earnings estimates for 2012 are close, at current levels that makes HNZ a $60+ stock that also happens to pay a 3.65% dividend. Growth of 11% on top of a healthy dividend? Not bad for an industry stalwart – especially compared to the others.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.