H. J. Heinz & Co. (NYSE:HNZ) manufactures and markets a wide range of processed food products across the globe. Main competitors of the company include major food and consumer companies such as Kraft Foods (NYSE:KFT), Tyson Foods (NYSE:TSN), ConAgra Foods (NYSE:CAG) and Campbell Soup Company (NYSE:CPB).
The company’s principal products include ketchup, condiments, sauces, frozen food, soups, baked beans, pasta meals, infant nutrition and other food products. Heinz Ketchup, one of the key brands of the company, holds 60% share in the U.S. ketchup market, 70% in Canada and about 80% in the U.K. Other popular brands of the company include Classico sauces, Ore-Ida selling potato based frozen foods and Weight Watchers Smart Ones selling low fat, low calorie and high fibre meals to the diet conscious consumers.
Here we provide a quick snapshot of our estimate of the intrinsic value of Heinz’s stock. We breakdown the company’s operations into product-based segments and forecast the key drivers affecting each segment to arrive at our price estimate.
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Ketchup, Condiments And Sauces
The ketchup, condiments and sauces division includes manufacturing and sale of tomato ketchup, vinegar, chilli and cocktail sauces, marinades and dips, refrigerated dressings, pickles, relishes, mustard and gravy. In 2011 the segment contributed to around 45% in sales and operating income of the company.
The global ketchup and sauces market size has witnessed a CAGR of ~3%, during the past three years. We expect the growth rate to accelerate to around 3.6% per year in the coming years, on the back of better macro-economic conditions. Heinz increased its market share in the segment from around 9.5% in 2009 to around 10.5% in 2011, powered by the acquisition of Brazil’s Coniexpress S.A. Industrias Alimenticias (maker of Quero brands). According to our estimates, the company should further gain market share in the segment in coming years, helped by its high brand equity and expansion into emerging markets.
Meals And Snacks
The Heinz meals and snacks division mainly consists of frozen foods, pasta meals, baked beans, soups and other food products. This division contributed to around 39% in revenues and EBITDA during 2011. The global meals and snacks market size has grown from around $200 billion in 2008 to $220 billion in 2011. We expect the trend to continue at an annual rate of around 3.5% to become a $300 billion market by the end of our forecast period, fuelled primarily by the growth coming from emerging economies.
Although the company has a broad and diversified product range in the segment, marked by well known brands such as Ore-Ida and Smart Ones, we do not expect it to be able to build a lot on its current 2% market share. This is because of limited presence and tough price competition in the emerging markets.
The infant/nutrition division of Heinz sells bottled baby food (milk products and juices), baby cereals and frozen foods, baby soups and snacks. Some of the brand names the company operates in the segment are Heinz for Baby, Farex, Mum’s Own, Farley’s and Complan. The segment made up around 11% of consolidated sales and operating profits in 2011.
The global infant/nutrition market size has been fast growing at approximately 8% CAGR over the past few years. We expect the growth momentum to continue, helped by population growth in Asian countries such as India and Indonesia, and increasing demand for convenient baby food products due to rising percentage of working women population.
Despite a special focus by the company on this segment and emerging markets, we feel the company would slightly lose market share to around 4% over the forecast period because of stiff price competition, and relatively higher growth in the overall market size.
Although rising input costs due to higher commodity prices like tomatoes, potatoes, meat and oil and higher marketing spends to gain share in emerging markets may put pressure on the company’s operating margins. We expect savings from productivity and efficiency measures, along with price hikes to allow the company to maintain consolidated operating margin at around 18.5% over the forecast period.