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Should You Buy It? Heinz Has Some Kick

The ketchup kingpin issues a hefty hike in earnings guidance.

H.J. Heinz


issued blowout fiscal first-quarter (ended July) guidance at its annual investor meeting Tuesday, giving investors reason to celebrate.

The company said it now expects to earn 62 to 63 cents a share for the quarter, compared with the previous consensus analyst estimate of 55 cents. Heinz will report its full quarterly results Aug. 24.

Despite gaining about 3% in Tuesday trading, closing at $43.98, Heinz shares remain down more than 2% since the beginning of the year. With that in mind, I'm here to answer readers' questions: Should you buy shares in Heinz? Will it be a one-hit wonder, or does the stock still have further upside potential?

Management attributed the upside this past quarter to some 100 new products launched over the past 12 months, backed by a 25% increase in marketing spending. Further product innovation is expected in the coming quarters, with Heinz slated to introduce a total of 200 new products in fiscal 2008 (ending April).

Organic revenue (excluding acquisitions) improved 5% year over year, driven by double-digit sales growth in the core ketchup business, as well as the company's soups and beans products. In addition to those products, Heinz owns dozens of food brands, including Ore-Ida potatoes and Weight Watchers foods.

Heinz's fiscal 2008 guidance is for 14% annual operating income growth on 9% higher overall revenue. The company also stands to benefit from a weak dollar with about 52% of its sales generated overseas. As a result, management said that full-year earnings would come in at the high end of its previous guidance of $2.54 to $2.60.

Management said the new earnings guidance includes the expectations for commodity costs to rise by more than the $180 million increase realized in fiscal 2007, though it should be able to pass along the majority of this to customers.

At the urging of activist investor Nelson Peltz of Trian Fund Management, who owns more than 5% of the shares outstanding, the company has sold many underperforming brands and closed 20 plants over the past 18 months to cut operating expenses.

At current levels, Heinz is now trading at less than 17 times expected full-year earnings, including a 12.5% discount to


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and a 7% discount to

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Something else that makes Heinz's stock look attractive compared with its peers is the company's 3.4%

dividend yield. Heinz declared its latest 38-cent quarterly dividend Tuesday, and investors at the close of trading Sept. 18 will qualify for the Oct. 10 payment. The company also announced a $1 billion stock-buyback program in June 2006, but management said at Tuesday's investor meeting it's more interested in pursuing acquisitions for the time being than buying back shares.

In addition to offering a solid defensive investment in the current volatile trading environment, Heinz is also exhibiting solid earnings momentum for the first time in several years. With that in mind, I believe the stock is attractive to purchase at current levels. In addition to collecting the industry-leading dividend yield, Heinz shares could trade up toward the low-$50s over the coming quarters.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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