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:
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
FCF $ Millions
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.