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Patrick McKeough is one of Canada’s top safe-money advisors. The Wall Street Journal, Forbes and The Hulbert Financial Digest have all recognized his ability to find stocks with hidden value. He is editor and publisher of The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor; inventor of the Quick Profit/Value System and the ValuVesting System™. A best-selling Canadian author, he wrote Riding the Bull, the book that predicted the 1990s stock-market boom.

Great companies think alike

October 29, 2010 -  Be the first to comment
Posted by: Pat McKeough Filed in: Growth Stocks
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A key part of our three-part investment approach is to stick with well-established, dividend-paying companies. (The other two parts are to spread your money out across the five main economic sectors, and downplay stocks in the broker/public-relations limelight.)

Most well-established companies have built up strong reputations that can help them overcome the inevitable downturns. Their trusted brands also make it easier for them to launch new products, or expand into new markets.

Heinz and Campbell Soup are two good examples. Both companies began operating in 1869. Together, they own some of the best-known brands in the food industry. Their strong brands are helping them enter fast-growing markets, such as China, India and Russia. As well, both companies are introducing healthier products to spur sales in developed countries.

H.J. HEINZ CO. $49 (New York symbol HNZ; Income Portfolio, Consumer sector; Shares outstanding: 318.3 million; Market cap: $15.6 billion; Price-to-sales ratio: 1.5; Dividend yield: 3.7%; WSSF Rating: Above Average) makes a wide variety of processed foods, including condiments, sauces, soups, baked beans, pastas and infant food. Its flagship product, Heinz Ketchup, accounts for about 60% of U.S. ketchup sales.

The company continues to expand its main brands, including Ore-Ida (frozen potatoes), Classico (pasta sauces) and Weight Watchers (diet foods). Heinz’s 15 top-selling brands each generate annual sales of over $100 million. Together, they supply 70% of Heinz’s total sales.

Heinz’s sales rose 21.4%, from $8.6 billion in 2006 to $10.5 billion in 2010 (fiscal years end April 30).

Earnings rose from $2.18 a share (a total of $750.2 million) in 2006 to $2.90 a share (or $923.1 million) in 2009. Earnings fell to $2.87 a share (or $914.5 million) in 2010, because unfavourable foreign-exchange rates cut earnings by $0.29 a share. Without exchangerate changes, earnings per share would have risen 9.3%.

Heinz plans to cut costs by a total of $1 billion over the next five years. It aims to achieve this by improving productivity, including installing uniform computer systems. It will also buy more raw materials in bulk.

The savings from this plan will help Heinz absorb rising costs for ingredients, including wheat and corn. The savings will also help pay for the company’s push into China and other fast-growing markets. Right now, these markets account for 15% of Heinz’s sales. The company aims to raise this to 25% by 2016, and eventually to 35% to 40%.

Part of the company’s growth strategy involves buying food companies in overseas markets. For example, Heinz recently agreed to pay $165 million for privately held Foodstar, a leading soy sauce maker in China. Heinz is also developing new products for these markets, including an infant formula that it will soon launch in China and Russia.

Higher ad spending should boost sales

Heinz also aims to spur sales by spending more to promote its products. In 2010, it spent $375.8 million on advertising, up 24.0% from $303.1 million in 2009.

The company’s strong balance sheet will support its expansion. Its total debt of $4.5 billion is a manageable 29% of its market cap. Heinz holds cash of $494.5 million, or $1.55 a share.

Heinz will probably earn $3.06 a share in fiscal 2011. The stock trades at 16.0 times that figure. The company continues to raise its dividend annually. The current rate of $1.80 a share yields 3.7%.

Heinz is a buy.

CAMPBELL SOUP CO. $36 (New York symbol CPB; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 335.7 million; Market cap: $12.1 billion; Price-to-sales ratio: 1.6; Dividend yield: 3.1%; WSSF Rating: Above Average) is the world’s largest maker of canned soups. It also makes Prego canned pasta and sauces, Pepperidge Farm cookies and V8 vegetable juices.

The company gets 30% of its sales from international markets. Its biggest foreign markets are Australia and Europe.

Campbell looks overseas for growth

Like Heinz, Campbell aims to spur its long-term growth through higher sales in emerging markets. It now sells its soups in 22 Russian cities, and aims to reach 100 cities in the next few years. In China, Campbell recently launched a low-cost can of broth. Canned foods account for a tiny fraction of total food consumption in these countries, so there’s lots of room to grow.

Campbell is also developing more healthier products. For example, it now sells low-sodium soups and vegetable drinks, as well as baked goods made from whole grains. These premium products generate higher profit margins than Campbell’s regular products.

The company’s sales rose 16.0%, from $6.9 billion in 2006 to $8.0 billion in 2008 (fiscal years end July 31). Sales fell to $7.6 billion in 2009, but rose to $7.7 billion in 2010.

Earnings rose from $1.73 a share (or a total of $720 million) in 2006 to $1.99 a share (or $792 million) in 2007. In 2008, the company sold its Godiva chocolate business for $850 million. As a result, earnings fell to $1.75 a share (or $671 million). Earnings improved to $2.42 a share (or $844 million) in 2010. If you exclude unusual costs, the company would have earned $2.47 a share in 2010, up 11.8% from $2.21 in 2009.

Campbell’s total debt of $2.8 billion is a low 23% of its market cap, so it can easily afford to make acquisitions and invest in new products. It also holds cash of $254 million, or $0.76 a share.

Earnings should grow to $2.63 a share in fiscal 2011. The stock trades at 13.7 times that figure.

Campbell Soup is a buy.

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