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Investment Overview for H.J. Heinz Company (NYSE:HNZ)
Below are key drivers of Heinz's value that present opportunities for upside or downside to the current Trefis price estimate for Heinz:
Heinz EBITDA Profit Margin:
We currently forecast Heinz EBITDA profit margin to gradually improve from about 17.7% in 2012 to about 18.4% by the end of the Trefis forecast period. There could be a 10% downside to the Trefis price estimate if the margins continue to stay close to the 2012 levels of 17.7% owing to the possibility of higher commodity inflation in the future. At the same time, there could be a 10% upside to the price if the margins improve to around 20% by the end of the Trefis forecast period.
Ketchup, Condiments and Sauces Market Share:
We currently forecast that Heinz's market share would rise gradually over the next few years. There could be a 10% downside to the Trefis price estimate if the market share were to remain close to 2012 levels.
H. J. Heinz Company and its subsidiaries manufacture and market an extensive line of processed food products throughout the world. The company’s principal products include ketchup, condiments, sauces, frozen food, soups, beans, pasta meals, infant nutrition and other food products. The firm's major brand is Heinz Ketchup, which has a 60% share in the US, 70% in Canada and about 80% in the UK. Other popular brands include Ore-Ida frozen potatoes, Weight Watchers Smart ones frozen dinners, Classico sauces, Jack Daniels barbecue sauces, and ABC Indonesian sauces. Heinz’s top 15 brands make up 70% of its sales.
Over the last decade Heinz has undergone significant restructuring, by shedding its less profitable non-core businesses and focusing more on its core products and brands. Its growth strategy includes organic growth as well as strategic acquisitions to expand its presence in emerging markets. Emerging markets currently generate around 20% of the company's total sales. Heinz is aiming to grow this to 25% by 2016 and 40% in the long term.
Products are sold through the firm's sales organizations, independent brokers, agents, and distributors to grocery accounts, convenience stores, bakeries, pharmacies, mass merchants, club stores, and food service distributors.
They are also sold to institutions such as U.S. Foodservice as well as various hotels, restaurants, hospitals, health-care facilities, vending machines, take outs, and various government agencies.
High market share in Ketchup, Condiments and Sauces
Heinz is a market leader in the Ketchup, Condiments and Sauces market with a 60% market share in the US, 70% in Canada and 80% in the UK. The divisions global market share has risen from 9.7% in 2008 to about 10.6% in 2011 and is expected to touch almost 11.6% by 2017, mainly through the strengthening of the firm's position in emerging markets. Although the global market size of the Meals and Snacks segment is about 4.5 times the global market size of Ketchup, Condiments and Sauces, Heinz occupies only about a 1.5% market share in the former, but has a market leading position in the latter, making it Heinz’s more valuable division.
Special focus on the Infant/Nutrition segment
The division contributed to about 11% of Heinz’s 2011 revenues but is expected to provide significant growth momentum for Heinz in the coming years, especially in the emerging markets, with an overall growth rate exceeding 8%. Indian brands like Complan and Glucon-D have witnessed double digit growth rates and will continue to do so in the coming years. We thus expect Heinz to maintain strong growth rates in the years to come.
Rising commodities prices
Rising commodities prices of the raw materials like potatoes, meat and oil have lead to higher production costs for Heinz, forcing them to make difficult choices between raising prices and passing on the costs burden to its customers or decreasing its own profit margin. High commodity inflation will put pressure on future profitability despite some protection through Heinz's pre-season futures contracting to protect against volatile commodity prices.
Expanding presence in emerging markets
Heinz is focusing on the rapidly growing emerging markets as the key to its future growth. As a result of the rapid middle class expansion and growth of western restaurants, Heinz is expected to generate 20% of sales from emerging markets by 2012 and 30% by 2016. The focus markets include Brazil, India, China, Indonesia, Russia and Poland. The strategy includes both strong organic growth as well as strategic mergers and acquisitions, such as the recent purchase of the Quero brand in Brazil and the Foodstar brand in China.
Unfavorable exchange rates
The rising value of the dollar may impact Heinz's revenues and profit margins by decreasing the value of sales made in international markets, especially in large markets like Europe.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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