Analysts hailed Heinzs results as relatively solid

Analysts hailed Heinz's results as relatively solid

HJ Heinz reported a rise in first quarter profits this week as sales in developing markets soared.

Earnings reached US$240m compared to $213m in the prior year, while reported sales climbed 1.6% to $2.48bn as Heinz delivered 3.6% organic sales growth across its global portfolio.

Analysts hailed the results as relatively solid, particularly given the economic environment, and had estimated $2.52bn, the average of nine projections compiled by Bloomberg. Earnings topped the average estimate.

Sales growth in North American consumer products was fairly strong, sales were up 4.8% based on 5.3% volume and a 1.7% impact from foreign exchange led by ketchup, Smart Ones, and pasta sauce.

Sales growth in Europe however, was more downbeat based on a weak consumer and an intense promotional environment, with sales down 7.7%. Weakness was also seen in Australia.

"Looking forward, management gave a rather tepid view of growth in both regions, as the consumer remains weak," said Sanford Bernstein analyst Alexia Howard. "Instead, management said they are focused on nurturing growth opportunities, including acquisitions, in the emerging markets."

And it is in the developing markets that Heinz is indeed now focused.

Speaking on the firm's earnings call on Wednesday, chairman, president and CEO William Johnson told analysts that the company is seeing more M&A opportunities in emerging markets, as the division represented 17.8% of the group's business in the first quarter.

"We're trying to figure out the best way to deploy our capital not just for a short-term benefit but for the long-term health of the organisation," Johnson said. "Our goal is to figure out ways to continue to drive that [growth] while building the infrastructure in the regions where we are now and in some of the markets where we feel we can leverage, much like Food Star in China.

"My preference is to still continue to look for those M&A opportunities that exist in the emerging markets and I can tell you we are not spending much time looking for M&A opportunities in the US or Western Europe, our focus is entirely on the emerging world," Johnson insisted.

He added that Heinz is eyeing businesses of all sizes in the developing markets, with a preference for the "buy and build" approach.

"Emerging markets was a strong growth driver for the company, providing 22% organic sales growth in 1Q and reaching 18% of the company's total sales," Howard said. "We think that Heinz's efforts to spur innovation, expand in emerging markets and drive productivity make a lot of sense. Growth opportunities for the company look compelling as Complan and Glucon-D in India perform well, and baby food products are launched in China and elsewhere."

However, in the near-term, Howard said she is cautious on macroeconomic weakness in Europe, on the outlook for frozen entrées in the US as ConAgra continues to ramp up on promotional activity in the category and on possible acquisitions.

Nonetheless, Heinz is confident for the remainder of the year and reaffirmed its previously announced outlook for fiscal 2011.

"We remain confident about the company's business fundamentals, despite the difficult economic climate," Johnson said. "While we anticipate that our full-year results will be impacted by foreign currency movements, we plan to continue executing our well-established strategy to grow our core portfolio, accelerate growth in emerging markets, strengthen and leverage global scale and make talent an advantage for Heinz."

Barclays Capital analyst Andrew Lazar believes management is still looking for a better top line in the first half.

"As expected, Heinz reaffirmed its outlook on a constant currency basis, and continues to look for sales growth in the 3-4% range, and EBIT and EPS growth in a the 7-10% range," Lazar said.

"Management still looks for better top line in fiscal 1H (largely volume driven) and improved profit trends in fiscal 2H. We do not expect management to provide a new range for reported EPS, though we don't believe Heinz's currency basket has changed meaningfully since late May, when it last discussed its outlook. This would still suggest reported EPS in a $2.95-$3.05 range."

Bernstein rated Heinz with a price target of $49.

Heinz shares were up $0.43 or 0.93% to $46.70 at close of New York trading yesterday.