H.J. HEINZ CO. $46 (New York symbol HNZ; Income Portfolio, Consumer sector; WSSF Rating: Above average) is one of the world’s largest producers of condiments and sauces, and accounts for 60% of ketchup sales in the United States. Other products include frozen meals, soups and baby foods.

In September 2006, two nominees affiliated with billionaire investor Nelson Peltz became directors of the company after a lengthy proxy fight. Heinz has had six restructurings in the past 10 years, with moderate success. Peltz wants management to be more aggressive in cutting costs and expanding sales.

It looks like the pressure is starting to work. In Heinz’s second fiscal quarter ended November 1, 2006, profits from continuing operations rose 20.4%, to $0.59 a share (total $197.4 million) from $0.49 a share ($168.3 million) a year earlier.

However, Heinz had to reverse a tax provision in the year-earlier quarter, which cut its tax bill. If you disregard this, the company would have earned $0.60 a share a year ago. Using that figure, pershare income in the latest quarter fell 1.7%.

Still, Heinz’s operating profit margin improved to 17.2% from 16.1%, as better productivity helped offset rising costs for vegetables, packaging and energy.

Sales rose 3.2%, to $2.23 billion from $2.16 billion. If you disregard acquisitions and divestitures, Heinz’s sales grew 6.1%.

A big part of the company’s restructuring plan is new products, particularly healthier foods with less sugar and salt. It’s also making more products for people with food allergies or digestion problems. New convenient packaging, such as a compact ketchup bottle designed to easily fit in a refrigerator door,
should also spur sales.

Along with these new products, Heinz plans to increase its marketing spending by 20% this year, to 3.5% of sales.

Heinz’s aggressive share repurchase program should continue, despite the higher marketing costs. It spent $204.1 million on share buybacks in the first half of fiscal 2007. The company has also increased its dividend every year for the past three years. The current rate of $1.40 yields 3.0%.

The stock has gained 35% in the past year, and now trades at 19.5 times its likely fiscal 2007 profit of $2.36 a share. That’s high, but reasonable in light of the strong earnings potential of Heinz’s brands.

Heinz is a buy.