Heinz (HNZ) had an Analyst Day on Thursday last week with about four hours of management presentations and Q&A posted on the investor relations section of the Heinz website. This presentation is a wonderful way to understand the Heinz business model and appreciate the strategic vision of the company. Heinz stock had a relatively strong run hitting new all-time highs around $55. Post-results the shares have pulled back based on fears relating to the extent of reinvestment into restructuring projects, weakness in the frozen entrée category, exposure to Europe, and a near-term reduction in sales expectations as the company is being hit by foreign exchange and focusing on some low hanging fruit margin opportunities.
Despite the concerns, Heinz is very well positioned strategically with a number of positives within the US listed food space. Here are the emerging market related strengths:
- Heinz has acquired and organically grown food businesses in the largest emerging markets including: China, Brazil, Russia, India and Indonesia.
- Heinz over-indexes to emerging markets with 21% of sales coming from this region and near-term visibility to get to 25% of sales.
- Heinz margins are held back in EM through reinvestment but are set to expand over the next number of years.
- Heinz offers a number of categories in emerging markets (not just ketchup) including a variety of sauces, canned foods and infant nutrition.
In the developed markets Heinz also has some strengths which translate well financially:
- A dominant position within the food service industry
- Stable cash flow generation from high replenishment products
- The ability to pay consistently growing dividends from the cash flows
Heinz is implementing some productivity and efficiency programs a couple of years behind other global food peers. This is both a disadvantage and an opportunity. The opportunity comes from the ability to have some high visibility margin gains through productivity initiatives which have been tested and trialed at other companies. Heinz calls the initiatives in this area: “Project Keystone”. Heinz has also been hit by commodity cost inflation over the past year so there should be decent ability to grow gross margins going forward.
Heinz is a company which is growing both earnings and cash flow in steady fashion which has enabled the ability to pay a high dividend. The dividend yield is very close to 4% today (3.89% over the weekend) and the forward P/E is about 15x. With the company exhibiting steady growth and the stock relatively flat, the value in the shares has improved over the past year. During this time, Heinz has also grown the emerging market business in outsized fashion. Last year, organic growth for the emerging market segment was 16.4%. Many emerging market only food companies have P/E multiples in the high 20s or 30s. With Heinz growing this exposure to 25% of sales soon, the stock is a nice backdoor way to participate in emerging market consumption growth while being invested in a low volatility and low beta stock which pays a healthy dividend. The stock price just needs to appreciate by 6% a year to generate a 10% total return. Heinz is positioned to be a winner over the longer-term.