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has made progress in getting rid of some U.S. noncore operations, and is close to completing a number of sales of noncore international operations as well, which is what investors will be tuning in for on Tuesday morning's earnings call.
The moves will allow for more focus on operations where the company has the advantage. That has already happened in the U.S., where its namesake ketchup, sauces, Ore-Ida brand and food service have made good contributions to earnings growth. At the same time, billionaire investor and shareholder Nelson Peltz is trying to get other investors to pressure the company to improve its operations. So where do we stand now?
The dilution from getting rid of the noncore operations brings 2006 EPS down to $2.10, which may be optimistic. There will be about $1 billion in proceeds that could be used to buy back 7% of the company's shares at $40 per share. That would yield a new earnings base of $2.26 per share.
Using that as a base, the stock at $37.50 discounts a 5%, five-year growth rate in EPS using a 2% terminal growth rate and the 4% risk discount rate I use for consumer staples companies with strong market shares. This seems about right to me, if one assumes that the European situation does not get better.
If the situation there does get better, then we could use the numbers put out by Heinz's seemingly always too optimistic management that it can do sales of 2%-3%, operating income of 4%-5% and 7%-8% EPS growth longer term. That 8% EPS growth implies a $42 price, only 13% above the present price.
Additionally, there is no advertising to cut, but probably advertising to add, with the company's domestic media spend having been a paltry $14 million in 2005 vs. $84 million for little Smucker (of
) and even $31 million for
, which has no consumer brands.
I believe that investors have to be thinking Peltz can sell all of the company if they stand to make some real money here.
would make the most sense for domestic operations, as it has overlap in tomato products, potatoes and frozen dinners.
But while Heinz investors wait for such an occurrence, they will probably have to deal with some slowing of earnings growth. Nielsen data show that Heinz's retail dollar sales grew 2.9% in the four-week period ending Jan. 28, but volume was up only 0.4%, with a 2.5% price increase. This is acceleration in pricing from the last six to nine months of flattish pricing, and it is a slowing of volume growth.
Better domestic focus and execution with fewer domestic categories have been a support for earnings growth lately. Back in November, some analysts were looking for about 8% sales growth, although at least 5 points were expected from acquisitions, and 9% operating income growth. But Ore-Ida volumes are slowing, and results will be lapping tougher comparisons as competitive activity increases.
Food service has a number of reasons to be slowing its contribution to earnings growth, which started to slow in the second quarter. These include more people eating salads and market-share gains by (noncustomer)
, among others, as this quarter's sales could be negative without acquisitions.
Then there is Europe, where sales pressure for food companies shows no real signs of abating. Here again, sales probably would be reported as negative without the benefit of acquisitions. The European situation and how management intends to turn things around here will be a big subject for the Q&A section of the call.
Ron Thomas, CFA, was most recently with Colonial Management Associates (one of the mutual fund subsidiaries of Liberty Corp.) as an analyst covering consumer stocks. Colonial Funds was named by Barron's as its "Mutual Fund Family of the Year" for 2000, based significantly on its consumer staple stocks selection performance. From 1990 to 1999, Thomas was employed at ASB Capital Management in Washington, D.C. as an analyst and later as a co-portfolio manager with absolute discretion over stocks in the financial, consumer staples and consumer services sectors. Prior to that, Thomas was with First City Bancorp. in Houston following financials and consumer companies. He holds a B.A. in economics from Rutgers College and an MBA in finance/marketing from Cornell University.