Heinz, Foreign Co’s Benefit from Tainted Milk in China

-21.21%
Downside
72.49
Market
57.12
Trefis
HNZ: H.J. Heinz logo
HNZ
H.J. Heinz

A milk scandal hit China this week as tainted milk was found at the country’s largest dairy company, China Mengniu Dairy Co., during a state crackdown on food safety last month. This is Déjà vu of the tragic 2008 incident when melamine-tainted milk killed at least six infants and caused 300,000 people to fall sick. [1] The incident saw a huge rise in demand for foreign-branded products as Chinese consumers turned away from local food products. Foreign food companies such as Nestle S.A., H.J.Heinz (NYSE:HNZ) and Danone have a significant presence in China. Heinz competes with major food and consumer companies like Kraft Foods (NYSE:KFT), Tyson Foods (NYSE:TSN), ConAgra Foods (NYSE:CAG) and Campbell Soup Company (NYSE:CPB).

See our full analysis for H.J Heinz Company

Heinz Will Benefit

Heinz started selling baby food in China last year. It’s also has presence in China through Foodstar, a local food company that it acquired in 2010. CEO William Johnson expects business to double in China in the next three years. The Infant/Nutrition division contributes 13.3% to the overall stock price. Currently, Heinz’s market share in the global infant/nutrition market is 3.83% and we expect it to increase to 4.27% by the end of 2015, buoyed by growth from emerging markets such as China and Latin America.

In terms of percentage change, this might not be much. But as the Chinese market for infant and nutrition products increases in the coming years, it will add significant revenues for Heinz.

Heinz Ranks #1 for 12th Consecutive Year

H.J. Heinz was ranked first in the overall satisfaction index released by American Customer Satisfaction Index (ASCI) for the 12th consecutive year. [2] The result is testimony to the brand being an integral part of the U.S. households and Heinz’s commitment in delivering high quality products year-after-year. Since growth in the U.S. market has more or less saturated, the only way Heinz can increase revenues is by increasing its market share. And with strong customer loyalty and highly satisfied customers, Heinz will be able to improve its market share.

We have a $54.50 Trefis price estimate for H.J. Heinz Company, which is about 5% above the market price.

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Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Nestle Gains With Heinz as Chinese Turn Away From Toxic Local Food: Retail, Bloomberg, January 6, 2012 []
  2. Heinz Ranks Number One in Customer Satisfaction Among All 225 Companies in the American Customer Satisfaction Index(TM), Market Watch, November 15, 2011 []