H.J. Heinz’s Earnings To Show Growth But Slimmer Margins

H.J. Heinz Company (NYSE:HNZ) is scheduled to announce its Q4 earnings on April 24. We expect the revenue growth to be driven by ketchup and sauces as the company leverages its brand name in emerging economies and extends its portfolio of products. On a y-o-y basis, we could see some margin deterioration. But margins have been improving on a sequential basis so we should some improvement over the previous quarter.

We have a $51.21 Trefis price estimate for H.J. Heinz Company, which is about 5% below the market price.

See our full analysis for H.J Heinz Company

Ketchups and Sauces To Lead Top-Line Growth

Global ketchup grew 9% y-o-y on an organic basis in Q3 led by strong performance by the company in Latin America, U.S. Foodservice and Russia. Heinz derives more than 60% of its revenues outside the U.S. Ketchup sales for this quarter could be boosted by the introduction of smaller sized Heinz pouches that cost 99 cents for a 10-ounce pack to lower the entry price for price-sensitive consumers. Smaller-sized packs usually have higher margins, so the the impact of the move on the overall margins, if any, will be positive.

In October 2011, Heinz also introduced limited time Heinz Ketchup Blended with Balsamic Vinegar, but due to overwhelming customer response, the company decided to permanently add the ketchup to its portfolio of products. The company also plans to expand the production of Lea and Perrins sauces by a third to 12,500 tonnes by the end of 2013. Heinz benefits from its strong brand name (especially in ketchup) and a growing demand for ketchup, condiments and sauces in emerging markets.

Sales for Heinz’s infant/nutrition could benefit from the tainted milk incident in China earlier this year, which increased the demand for products made by foreign companies. Heinz is also present in China through Foodstar, a local company it acquired in 2010. Recently, Heinz also introduced probiotic juice in Australia although the impact of the move will not be felt in this quarter’s results.

Margins Under Pressure But Show Promise

On a y-o-y basis, margins fell in Q3 as the company battles high commodity inflation and increased SG&A (selling, general and administrative) expenses. Margins had also been impacted negatively by the price wars between Australia’s two biggest retailers, Coles and Woolsworth, which reduced the pricing for major food and beverage companies. However, on a sequential basis, margins have been improving as the company passes on the higher costs to consumers. Adjusted EBITDA margin declined to 17.3% in 2011 but we expect some improvement for 2012.

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