Earnings Preview: Heinz

Zacks

Packaged Foodmaker, H. J. Heinz Company (HNZ) is all set to report its second quarter fiscal 2013 results on November 20, 2012. The Zacks Consensus Estimate for the second quarter is 88 cents (estimated year-over-year improvement of 8.7%) on revenues of $2.85 billion (year-over-year increase 0.5%).

First Quarter Recap

Heinz’s first quarter 2013 adjusted earnings of 87 cents per share beat the Zacks Consensus Estimate by 4.8%. Earnings also exceeded the prior-year earnings by 10.1% largely due to a lower-than-expected tax rate, organic sales growth and productivity improvements.

Though reported revenues declined 1.5% to $2.79 billion due to currency headwinds, organic revenues grew 4.8%. Volume gains of 2.5% along with solid net pricing of 2.3% drove organic revenue growth in the quarter Revenues marginally missed the Zacks Consensus Estimate of $2.8 billion.

Agreement of Estimate Revisions

Over the past 30 days, one of 13 estimates has moved upward for the second quarter. None of the estimates has been revised downward over that timeframe. For fiscal 2013 too, only one of 16 estimates has been revised upward. Moreover, there have been no estimate revisions over the past 7 days either for the second quarter or for the full year.

At the first quarter call, management had provided its outlook for the second quarter. For the second quarter, the company expects organic sales growth to be around 4%, while constant currency earnings are expected to grow 10%. The target is expected to be achieved on the back of growth initiatives in the emerging markets, strong brand building investments and productivity benefits and cost savings from the company’s multi-year cost savings program, Project Keystone.

Gross margins are also expected to improve in the second quarter driven by pricing and productivity improvements, which will offset impact from commodity cost inflation. Marketing spend is expected to increase significantly in the second quarter due to new marketing initiatives in U.S., U.K. and emerging markets. Tax rate is expected to be in the low double digit rate. Foreign exchange is expected to continue to be a headwind in the quarter.

Notably, most of the analysts had adjusted their estimates following the announcement of the second quarter guidance, which partly explains the lack of movement in the past 7 and 30 days.

Magnitude of Estimate Revisions

Given the limited estimate revisions, the consensus estimate for both the second quarter as well as fiscal 2013 remained static over the last 7 as well as 30 days at 88 cents and $3.52, respectively.

Surprise History

Heinz has outpaced earnings estimates in all the past four quarters, recording a maximum positive surprise of 11.8% in the third quarter of fiscal 2012. On average, the earnings surprise is a positive 4.79% over the same timeframe.

Our Recommendation

We currently have a Neutral recommendation on Heinz. The stock carries a Zacks #2 Rank (a short-term ‘Buy’ rating), highlighting the stock’s positive momentum following earnings beat in the first quarter. A peer company, ConAgra Foods, Inc. (CAG) also carries a Zacks #2 rank.

We believe Heinz’s robust brand portfolio, continued strong growth in emerging markets, strong marketing investments and ongoing cost saving efforts will boost long-term growth. However, continued sluggishness in its largest segment, the North American consumer business, is a significant concern. Though management’s effort to turn around this business is encouraging, we prefer to stay on the sidelines until the company shows some success from its efforts.

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