H.J. Heinz Company: excellent yield and compelling emerging markets growth

H.J. Heinz Company ($HNZ) has compelling growth in emerging markets and a dividend yield over 3.50%.  At approximately $50/share, I believe $HNZ is fairly valued on a cash flow valuation basis.

Since its founding more than 100 years ago, Heinz has grown into a globally diversified manufacturer and marketer of packaged foods, selling through grocery stores, convenience stores, and food-service distributors. Its products include ketchup, condiments, sauces, frozen food, soups, beans, pasta meals, infant nutrition, and others; its namesake brand accounts for about 40% of annual sales. International sales account for 60% of the firm's consolidated total.

From Heinz's 3Q FY2011 Preview at the Consumer Analyst Group of New York Conference:

• Heinz is expecting its 23rd consecutive quarter of organic sales growth*
• Organic sales growth* of approx 2%
• EPS of approx $.84
• 14% organic sales growth* in emerging markets
• Full year outlook EPS of $3.04 to $3.10 and free cash flow of $1,200 million
• Heinz expects emerging markets at 30% of total sales by FY2016; currently at 16% of total sales

       (* Volume plus price)

I estimated the firm's WACC at 7.82% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2001	95
2002	678
2003	854
2004	1017
2005	948
2006	858
2007	851
2008	887
2009	875
2010	985
2011 est.	1200

Average Annual Growth ex-2001: 5.43%
CAGR ex-2001: approx. 4.78%

Consensus Forecast Industry 5-Year Growth: approx. 14% per year
Consensus Forecast Company 5-Year Growth: approx. 7% per year

Assuming the company achieves a 5-year growth rate in FCF of 7% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year	FCF $ Millions
0	1200
1	1284
2	1470
3	1470
4	1573
5	1683
Terminal Value	23023

The firm's future cash flows, discounted at a WACC of 7.82%, give a present value for the entire firm (Debt + Equity) of $21,663 million. If the firm's fair value of debt is estimated at $4452 million, then the fair value of the firm's equity could be $17,211 million.  $17,211 million / 321 million outstanding shares is approximately $54 per share and a 20% margin of safety is $43.


I don't have my required margin of safety here.  But, I like the firm's emerging markets growth, dividend yield and time-tested business model around packaged foods, ketchup and sauces so I'm persuaded to buy it at $50/share. 

Sources
Morningstar.com

Heinz.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.