Heinz Beats EPS, Misses Sales

H. J. Heinz Company’s ( HNZ - Analyst Report ) third quarter 2013 adjusted earnings from continuing operations of 99 cents per share beat the Zacks Consensus Estimate of 89 cents by 11.2%. The ketchup and sauce maker, which recently agreed to be sold to Warren Buffet’s company, Berkshire Hathaway, Inc. ( BRK.B - Analyst Report ) and a private Brazilian investment firm, has now outpaced earnings estimates for 7 straight quarters.

Earnings also exceeded the prior-year results by 3.1% driven by meaningful growth in emerging markets, especially Latin America; increased margins; and negligible headwinds from currency. Adjusted earnings from continuing operations in the quarter excluded certain charges for earn-out settlements related to the fiscal 2011 acquisition from Foodstar Holding.

During the quarter, total sales for this maker of the popular Heinz ketchup increased 2.0% to $2.93 billion. Revenues marginally missed the Zacks Consensus Estimate of $2.99 billion. Organic top-line growth was 2.3%, less than management’s expectation of around 4% growth in the second half. In the quarter, volumes grew only 0.3% while net pricing added 2.0% to top-line growth. Divestitures reduced net sales by 0.3%. Currency fluctuations hurt revenues by 0.1%, much lower than last quarter’s 2.4%.

Core Top-Line Drivers

The emerging markets recorded organic sales growth of 17.6%, while the reported growth was 18.8%. Emerging market growth was led by Latin America, Indonesia and China. Emerging markets comprised 23% of total sales. The economic outlook of these fast growing nations is positive, given the improving standard of living of the middle class.

Global Ketchup sales grew 4.2% organically driven by strong performance in Russia, Latin America and Canada. However, global ketchup sales improved 4.7% on a reported basis.

The company’s top 15 brands recorded 2.6% organic sales growth, driven by strong sales of brands like Heinz, Quero, ABC, Classico, and Master. However, on a reported basis, the top 15 brands’ revenues improved 2.2%.

Margin Details

Excluding productivity charges in the prior-year quarter, Heinz’s gross profit grew 4.8% to $1.11 billion. Gross margin went up 100 basis points to 37.7% driven by productivity improvements and pricing gains, which offset the impact from commodity cost inflation. As expected by management, gross margins are showing better growth in the second half.

Adjusted operating income increased 4.3% to $480 million driven by gross margin expansion and productivity improvements.

The company’s third quarter effective tax rate was 19.3% in the quarter, down from 20.0% a year ago. The tax rate was less than management’s expectation of being in the low to mid 20% range. This may also have benefited earnings in the quarter.

Agreement to Be Acquired

In one of the largest acquisitions ever in the food industry, last week, Heinz agreed to be acquired by an investment group led by Warren Buffet’s company, Berkshire Hathaway and private Brazilian investment firm, 3G Capital for $28 billion, including debt. Berkshire Hathaway, led by Warren Buffett, owns leading businesses across a variety of industries while 3G Capital is a global investment firm holding stake in companies like fast food chain, Burger King Worldwide, Inc ( BKW - Snapshot Report ) .

Heinz’s shareholders will receive $72.50 per share, a 19% premium to Heinz’s all-time high share price. The transaction has been approved unanimously by the board but is subject to shareholder and regulatory approvals. The deal is expected to be closed in the third quarter of this calendar year. Heinz will become a private company after the acquisition is complete.

Heinz carries a Zacks Rank #3 (Hold). Another food company going strong since the past few months is ConAgra Foods, Inc. ( CAG - Analyst Report ) which carries a Zacks Rank #1 (Strong Buy).