Despite a big surge in the markets Tuesday, investors weren’t interested in H.J. Heinz (NYSE:HNZ). The shares were off 1.21% to $51.44.
On its face, Heinz had a good quarter. Profits came to $226.1 million and revenues grew by 15% to $2.85 billion. However, the outlook was a bit of a disappointment. The company expects to earn as much as $3.32 per share for the year. But the consensus was $3.35.
Despite all this, is Heinz a good buy? To see, let’s take a look at the pros and cons:
Pros
Emerging markets. Heinz’ investments are paying off. In the latest quarter, the company posted strong growth in countries like China, India and Brazil. This trend is likely to continue for many years to come.
Acquisitions. With its strong cash flows, Heinz has been able to execute savvy deals. One of the standout transactions was for Foodstar, which has been key in expanding the company’s footprint in China. The business is growing at over 20% and has generated about $350 million in sales this year.
Innovation. In the consumer products space, it is critical to keep launching new concepts. And Heinz has a pretty good track record. For example, the company is making inroads with nutritional dinner products. Yet innovation is also about working with partners. To this end, Heinz has a joined-up with Coca-Cola (NYSE:KO) to create the sustainable PlantBottle.
Cons
Economy. On its earnings conference call, Heinz indicated the U.S. economy is showing lots of strain. After all, consumer confidence has hit the lowest level since 1980 (and is suggesting another recession). Because of this, customers are using more coupons and getting increasingly circumspect on purchases.
Commodity inflation. This definitely is becoming a bigger problem for Heinz (however, the recent drop in oil prices might provide some relief). To deal with this, the company has been hiking prices as well as focusing on productivity-enhancing strategies. But these can be tough to pull off on a long-term basis.
Competition. The packaged-food business has many large rivals, such as Campbell Soup (NYSE:CPB) and ConAgra (NYSE:CAG). There also are challenges in getting distribution, such as from operators like Wal-Mart (NYSE:WMT) and grocery stores. In fact, these companies are focusing more on private-label brands.
Verdict
Even though there was weakness in the latest quarter, Heinz definitely has bright prospects. The company has global brands, a strong distribution system and lots of growth opportunities in emerging markets.
Plus, Heinz is getting creative about providing low-priced alternatives, especially in the U.S. This involves targeting those consumers who spend $50 or less on groceries per week.
Oh and Heinz pays a hefty dividend of 3.7%. This certainly is attractive in today’s low-rate environment.
So in light of the advantages, the pros outweigh the cons on the stock.
Tom Taulli is the author of various books, including “All About Commodities.” He does not own a position in any of the stocks named here.
