Wednesday, July 22, 2009

Volume 3, Issue #67

Also in Today's Issue...

Heinz (NYSE: HNZ) is one of the world's leading packaged foods companies. The firm is best known for its ketchup, which sits in roughly three out of every five kitchen pantries and restaurant tables nationwide. But there is far more to the company than you might realize.

The company also sells mustard, gravy, pickle relish, barbecue sauce, and a full line of other marinades and condiments. It stocks grocery store shelves with appetizers such as taquitos and bagel bites, as well as full entrees sold under the Smart Ones, TGI Fridays, and Boston Market labels.

From Ore-Ida potatoes to Classico pasta sauce, the Heinz family includes over a dozen popular brands that each pull in more than $100 million in annual sales. Its products occupy the No. 1 or No. 2 market share in over 50 countries around the world.

Heinz may not be the flashiest car on the lot, but it will get you where you need to go. While other firms wrestle with subprime write-downs, patent expirations, volatile commodity prices and other such concerns, Heinz quietly does the same thing it has been doing for well over a century.

That's not to say the company has exhausted its growth opportunities. Management has made a concerted effort to divest non-core business lines and focus on what it does best, and those decisions have paid off. Over the past four years, Heinz has posted 16 consecutive quarters of organic sales growth.

Meanwhile, returns on invested capital (ROIC) have expanded by 360 basis points and earnings have been rising at a double-digit pace. Better still, operating cash flows have been increasingly robust -- averaging 109% of net income. That means there has been plenty of cash on hand to divvy up among shareholders.

And the company has done just that -- hiking its annual dividend payments from $1.08 per share to $1.68. At current prices, that equates to a beefy yield of 4.5%.

Heinz is looking forward, hoping to capitalize on this recession by bolstering its marketing commitments while weaker players cut back. Changes in spending habits could also work in the company's favor, as internal research shows that 57% of Americans are eating out less -- resulting in far more home cooked meals. One extra backyard cookout could lead to sales of everything from pickle relish to Heinz 57 Sauce.

The bigger opportunities will be found overseas, particularly in emerging markets. Right now, developing countries throughout Asia, Eastern Europe and Latin America account for just 14% of the firm's sales. That percentage is expected to march swiftly to 20% within the next four years as the company focuses on building out its distribution capabilities and introducing innovative new products.

In the meantime, the company is already coming off record-breaking sales of $10 billion and earnings of $2.90 per share last year.

Action to Take --> Heinz is a lower-risk/lower-reward company. You may not hit a grand slam with the stock, but you won't strike out either.

Regardless of the turmoil in the global economy, the company will still sell about 650 million bottles of ketchup this year -- and management expects to dish out a helping of about 60% of net proceeds to investors.

As any ketchup connoisseur knows, sometimes good things are worth waiting for. My staff and I feel HNZ should be appetizing to income-oriented investors at prices below $42 per share.

Good Investing!

-- Nathan Slaughter
Editor
StreetAuthority Market Advisor

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