Wednesday, February 25, 2009

HNZ 3Q09 Eanrings 2/24/09-James Fowler

Heinz announced yesterday that 3Q09 EPS rose 12% to $0.76. This earnings growth reflects increased pricing, their decision to hedge translation exposures on key currencies, and higher organic sales of brands such as Heinz Ketchup and soup, and Classico pasta sauces. Net income grew 11% to $242M, due to favorable mark-to-market gains, as well as a lower effective tax rate of 26%. Organic sales grew approx 2% while unfavorable foreign exchange rates of 11.4% caused net sales to decrease 7.5%. Organic sales in emerging markets grew 9%, but decreased to 3.2% after the negative FX impact. Operating cash flow during the quarter increased 25% to $233M which reflects effective working capital management and tight control over capital spending.

Heinz reported a sound quarter during a challenging economics times. The results of the quarter reflect my original thesis of people staying in to eat more meals at home. Even during these tough times the Heinz brand ketchup showed organic growth which indicates that people are less willing to trade down to a value brand, at least for ketchup. Although the price increases came at the wrong time coupled with lower volumes, I still think Heinz is going to benefit from more consumers remaining at home to eat. HNZ seems to be in great shape and is also making great progress in emerging markets. Sentiment is to hold the position. Price target-$45 to $50

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