H. J.

HEINZ COMPANY

Image from H.J.Heinz 2012 Annual Report

FINA 2201: Company Analysis

Due: February 14, 2013 Professor Mazur
Prepared By: Chelsea Duquette, Brenda Marte, Elizabeth Menteur, and Mabel Setow

When going to pour ketchup on an order of French fries, one leans in for the bottle of Heinz. This action is a no brainer, what other ketchup would you reach for? Product leadership serves as proof of the success of a company that has transformed itself from just another condiment creator, to a household name. H. J. Heinz Co. (NYSE: HNZ), which is clearly an industry leader, refers to itself as the first name in ketchup, and boasts of its widespread popularity, claiming an impressive 650 million bottles [of Heinz ketchup] being sold every year, and approximately two single-serve packets of ketchup for every man, woman and child on the planet1. While the company has found wild success in the ketchup industry, Heinz not only produces condiments, but is also a leader in the food industry in general. Heinz owns many recognizable brands, such as Ore-Ida, Heinz Beans, Bagel Bites, Weight Watchers Smart Ones, Classico, and the internationally successful Plasmon, (baby food), and Watties (soup)2. With so many popular dining options from Heinz, its apparent that the internationally recognizable company is successful, and is sure to boast impressive profitability. While Heinz clearly has strength in its numbers and is considered to be a favorable investment, when looking for a dividend return, this ketchup king is an industry leader with a positive outlook for those looking to invest long-term. Since it has recently become so important to look at a companys strength post-recession, in order to fairly evaluate the stocks durability, Heinzs focus for their future during the difficult economic times should be taken into account. In 2009, Heinz CFO, Art Winkleblack, stated: "History has shown that companies that continue to invest in their businesses and brands during economic downturns ultimately outperform their peers. Thus we are continuing to invest in the long-term"3. This thought process proves to be the correct one for the company, as proven in its financial analysis, which can be found in Exhibit A. That same year Heinz increased its profit by 9%
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1 "Heinz - About Heinz." About. H. J. Heinz Company, 2012. Web. "[United States] Heinz - Our Food." Our Food. H. J. Heinz Company, 2012. Web. 3 "FEATURE: Heinz Survives Recession Thanks to Core Brand Investments; Excited by Infant Nutrition Potential." Food Industry News. Flex News, 16 Sept. 2009. Web.

from 20087. Heinzs ability to stand tall during global economic hardship is an important factor for investors attracted to stability to take note of. When examining Heinzs reports, its apparent that the company was able to have continued success following the recession. Shown in Exhibit A, Heinzs profitability improved in all aspects as the company transitioned from 2008 to 2009, and has remained at a steady pace since. The so-called recession proof company has remained strong, holding as a safe investment for those looking to gain a favorable return. Other than its annual 7% dividend payouts, Heinz also carries a positive Price/Earnings (P/E) ratio. Heinzs P/E ratio has remained relatively constant over time, proving that investors view the company in a hopeful light, and are willing to pay more per share. Stand-alone Heinz appears a safe investment, however interested investors should compare operational ratios between Heinz and its top three competitors. These competitors include Nestl (OTC: NSRGY), Campbells Soup Company (NYSE: CPB), and ConAgra Foods, Inc. (NYSE: CAG). All three of these companies have branched out into further industries in a similar fashion as Heinz. However, Heinz has been beginning to look towards further waters. Before discussing new international acquisitions though, the basics through ratio analysis must be observed. There are two ratios that will jump off the page when comparing Heinz to its competitors. These are Times Interest Earned (TIE) and the Total Debt to Total Assets percentage. Heinzs TIE shows that theyre making on average of about $4 of earnings for every $1 of interest. Sound okay? Not really. The competitor average for 2012 was over $12 earned for every $1 of interest charged. These interest expenses that Heinz is saddled with relate to the large amounts of debt Heinz has been carrying. Heinzs debt to assets ratio is 12% lower than its competitors with a percentage of 53%. That is almost a complete 50-50 relationship between assets and debt. If Heinz hits a wall this year it could be facing a decrease in overall asset and debt management performance. These debt levels are
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All Annual Reports are from the H.J. Heinz Company Website, Investor Relations <http://www.heinz.com/ourcompany/investor-relations.aspx>

troublesome. However, after exploring reasons for this annual increase in external financing there are some factors that can promise future earning potential. In 2011 Heinz acquired new brand name companies in Brazil and China4. The move to increase global standing sets back any company, but amazingly enough Heinz has managed to keep steady profits for the past five years, despite the recession. If these new global acquisitions prove successful Heinz could be looking towards a more profitable future. Although the debt may scare away some investors, there is a possible promise for long-term earning potential. It is safe to say that while Heinz fits nicely into a portfolio, and delivers a steady return, this company is not one of a rapid or highly volatile growth rate. Heinz plays the role of a safe investment for those looking to invest in long-term stocks, and can be perceived to remain as such as it progresses into the future. Compared to its competitors averages, Heinz proves it has a great ability to pay off its short-term liabilities with its short-term assets. As shown in Exhibit B, its current ratio is almost 1.5, which is above 1 and below 2, a clear sign that Heinz is in an acceptable financial position. Its 2012 current ratio is the highest it has been in 5 years, with consistently acceptable current ratios in the past. Furthermore, Heinz is more liquid than its competitors based on its quick ratio, which is the highest it has been in 5 years. The increase in the quick ratio is a sign that the company is experiencing top line growth, quickly able to convert receivables into cash, and is financially secure to meet its short-term obligations. Heinzs current ratio is slightly higher than its quick ratio, indication that the companys current assets are dependent on inventory. Having said all that, investors know that the quick and current ratios can be misleading, thus, we look at Heinz in terms of its Days Sales Outstanding (DSO) and Debt to Assets ratio. In terms of DSO, its current DSO is the lowest its ever been in 5 years, and lower than the competitor average. This proves that Heinz has been taking an average of fewer days needed to collect
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revenue compared to 5 years ago. This is good news for Heinz as they are quickly turning sales into cash, giving them an opportunity to utilize the cash again. Generally, Heinz is effective at bringing money in. Although when looking at Heinzs total debt to total assets ratio, Heinz is doing poorly, as many of its assets are financed by debt, putting the company in financial risk. This ratio improved compared to from 2008-2010, and is lower than the competitor average, as well as all of its competitors except for Nestl, another brand with international recognition. When analyzing Heinzs profitability the Basic Earning Power (BEP) ratio stands out the most. It shows the power of the firms assets and its influence over earnings before interest and taxes; we can see how strong of a company Heinz is in terms of earnings. Heinzs BEP ratio can be compared to other competing firms with different debt and tax situations. During 2012, Heinzs BEP ratio was 10%, in comparison to the industry average 12%. Being that Heinz has low or close to average asset turnover ratios, its presumable the BEP ratio would be lagging in contrast to that of the industry average. Heinzs BEP ratio was the lowest it has ever been in the last five years, which raises concern towards what factors are causing these fluctuations. According to the Wall Street Journal, on Heinzs last quarter, they incurred a lawsuit over their most recent patent for the Dip & Squeeze condiment packet development, which was referred to as a true packaging breakthrough5. However, it seems that their goal of attracting potential and existing customers to this new more appealing and convenient packaging has instead dissociated the company from its customers. Seeing that earnings are the driver that constitutes a high BEP ratio, this lawsuit could have strayed Heinz from achieving a competitive ratio in terms of earning power. Another way to successfully track Heinzs profitability is by analyzing its Free Cash Flows (FCF), shown in Exhibit F. FCF represents the amount of cash the company has after paying off most

Jargon, Julie. "Heinz Sued for Patent Infringement Over 'Dip and Squeeze' Ketchup Packet - WSJ.com." The Wall Street Journal- Business Edition. 2012. Web. <http://online.wsj.com/article/SB1000087239639044423310457759359055>

fixed expenses. Heinz can use this money to successfully run its operations, cover its liabilities and expand. However, and most importantly, in the eyes of the investor this money plays part in estimating dividend returns. Exhibit F shows a summation of quarterly FCF for the past five years. Overall, during the last five years the company has shown very erratic quarter-end FCF balances, but Heinz does have a consistent pattern within its quarters; they seem to have the highest FCF at the second quarter, and usually the lowest FCF at the third quarter6. This third quarter dip might be due to Heinz paying off dividends at their year-end around late April. Otherwise, a second possible assumption may be that the company is having problems attaining sales during that quarter, which may not be the case since summer means hot dogs and burgers, and hot dogs and burgers mean ketchup. During 2011, Heinz also sought out to fund a 7% hike in the dividends it pays out to shareholders4. In terms of stock value, Heinz has been delivering higher profits, and showing growth within emerging markets, leading to a near 19 times P/E, which is slightly above the competitor P/E average. It seems for now that Heinzs will remain an industry leader for a long time to come. Their stocks are appropriately valued, and management seems to be executing well by delivering constant returns to its shareholders. One way that Heinz can increase shareholder value is by lowing its debt levels; these high levels cause investors to view Heinz as a risky investment options. An important note to possible investors is that most of the debt is due to Heinzs recent expansion efforts. Overall, Heinz seems to show it can deliver sales growth in a struggling economic environment and can bounce back quickly from any economic lags.

HNZ Annual Cash Flow Statement - H.J. Heinz Co. Annual Financials."MarketWatch - Stock Market Quotes, Business News, Financial News. N.p., n.d. Web. 8 Feb. 2013. <http://www.marketwatch.com/investing/stock/HNZ/financials/cash-flow> 4 Is This High-Yield Blue Chip Worth Your Time? Demitri Kalogeropoulos. 2012. Web <http://beta.fool.com/sigmaswan/2012/09/04/high-yield-blue-chip-worth-your-time/10891/>