However, its overdependence on developed markets and a sluggish U.S. consumer are currently holding the company back.

Emerging markets are where growth is today. It’s clear that Heinz understands that, because emerging markets now account for about 14% of the company’s sales.  But the rate of Heinz’s emerging market sales growth is still disappointing.

Heinz has been growing this category, but only at a rate of about 1% to 2% of its total sales per year – even with the company’s brand acquisitions. And to make matters worse Heinz was hit with currency losses in its most recent quarter, and these currency dynamics will likely persist.

Heinz’s emphasis on China, Russia, India, as well as other emerging markets like Poland and the Middle East is encouraging.  But it is disappointing to see a lack of emphasis on Brazil.

In addition to the challenges Heinz faces in penetrating new markets, the company is up against strong headwinds at home. Heinz’s vulnerability to upswings in commodity prices poses a risk to margins.  And while Heinz has been confident enough in the strength of its brands to increase prices, more cash-strapped consumers are switching to generic brands to increase savings.  The result has been a 4% drop in volumes.  Consumer habits do not change easily, so this trend will be difficult to reverse.

Looking forward, the consumers in the United States and other advanced economies will remain weak.  American consumers, in particular, continue to struggle with high levels of debt, surging unemployment, and depleted nest eggs.  In fact, the wealth effect of seeing an average 15% drop in the value of their homes – which comprises some 70% of the equity of a typical U.S. household – and the huge drop in the equity markets – which represents another 20% of the wealth of households – has prompted consumers to increase their savings rate for the first time in decades.

The personal savings rateis near 5%, and it could exceed 8%.  This means that consumption will remain depressed and consumers will remain focused on cost savings for the foreseeable future.  Therefore, the shift at supermarkets to generic labels will continue.

This trend also will have a negative impact on Heinz’s food-service segment, which comprises almost 15% of its sales.   Food-service sales will suffer disproportionately as people stay more at home instead of dining out.

Longer term, as the U.S. and other advanced economies recover, and Heinz achieves stronger market penetrations in fast-growing markets, I believe it will indeed be able to produce above-average returns.  But in the meantime, very strong cashflows from its existing brands will support Heinz stock and allow the company to return an attractive dividend.

And right now, the 4.2% dividend yield that Heinz’s stock offers is very appetizing.  So long term holders should keep holding the stock.

However, the current headwinds for the company and challenges in the U.S. market, foreign exchange, commodity costs and other costs involved in penetrating new markets will keep limiting the stock’s appeal — even as a defensive play in down market periods.

The stock’s Price/Earnings to Growth (PEG) ratio, which is above 2, is a strong warning sign.  It says that buying at these levels is paying too high a premium for the Heinz’s earnings growth rate.  That is symptomatic of the headwinds in earnings that I mentioned previously.  Thus, it is not advisable to go into this stock right now.

I would stick with our many defensive stock recommendations, likeCampbell Soup Co. (NYSE: CPB), The Coca-Cola Co. (NYSE: KO)and Goldman Sachs Group Inc. (NYSE: GS), which have outperformed and are executing strongly in emerging economies.

Recommendation: Hold H.J. Heinz Co. (NYSE: HNZ) long term.  Short term-oriented buyers should abstain for the moment (**).

Source: H.J. Heinz Co. (NYSE: HNZ) Is a Long-Term Keeper, but Will Struggle in the Months Ahead

I have been following Campbell Soup for almost a decade, mainly as a fixed-income play.  Its reliable earnings and very strong cashflow allow it to pay a very attractive 3.6% dividend, which is very secure, given that it represents just 30% of the company’s earnings.

Also, this “Old Faithfull-like” revenue stream that grows steadily over time allows Campbell to repurchase stock recurrently, boosting earnings per share.  And the  company’s undisputed dominance in soups and its strong positioning in other products – like Swanson broth and canned poultry, V8 vegetable juices, Chunky chili, Prego and Pace sauces – command almost 25% operating margins, which lead all its peers, including superb competitors like General Mills Inc. (NYSE: GIS), Kellogg Co. (NYSE: K) and H.J. Heinz Co. (NYSE: HNZ).

The only place Campbell Soup has been lacking is in its growth, but that is about to change.   On May 26, Campbell Soup announced it the signing of a distribution agreement with the largest consumer staples distributor in Russia and Eastern Europe: Coca Cola Hellenic.

Coca Cola Hellenic, which is currently distributing in the Moscow region for Campbell Soup, will enlarge distribution to more than 100 cities and twelve regions across Russia, beginning in August.

The immensity of this step cannot be missed as the company clearly points out:

“Soup consumption in Russia is more than double that of the United States, where U.S. consumers eat approximately 14 billion soup servings per year. In Russia, nearly 32 billion servings are consumed each year, or approximately 230 servings per capita, which are still predominately homemade, making Russia the world’s second largest soup consuming market after China.”

This comes less than two years after the simultaneous entry of Campbell Soup in both China and Russia.  Since most of those markets are homemade soups, the convenience, high quality, and health-oriented focus of Campbell Soup products will offer the Russian and Chinese consumers a very compelling value proposition.

We can only speculate about the effects that similar efforts to expand in China, which the company must surely be working on, will have.  It won’t be long before these foreign forays make an impact on growth and margins, and thus the company’s stock price.

Remember that in emerging markets, consumer staples companies enjoy growing populations, growing real income per capita, and an under-served market for Campbell Soup’s products.  It is a profit growth playground.  In addition, the longer winters in much of Russia and in Northern China will decrease the typical seasonality of Campbell Soups sales, only 30% of which are international today.

The stock suffered over the past year, tumbling from its peak of $42.45 share to a recent low of about $25, which is a strong support going back to the 2002-2003 recession and even the year 2000.  The fundamental valuation of the stock is in line with peers, considering the very meager growth assumptions for the industry.  This is where the surprise lies and the catalyst for earnings surprises starting in the second half of the calendar year.

The long term technicals also show the stock oversold and have just turned to the upside, indicating a medium term upside potential to at least $32 a share, a 19% gain excluding solid dividends of 3.7%.

The company reported last week that its third-quarter profit fell sharply from last year, when it sold its Godiva Chocolatier brand, but its adjusted profit rose 3.6%. Excluding one-time items such as the sale of Godiva, the nation’s largest soup maker earned $171 million in this year’s third quarter, or 48 cents a share, up from $165 million, or 43 cents per share a year ago.

The company also said the strong dollar pushed its results down 4 cents per share. But the dollar rally that lasted for most of that quarter is gone and so were most of the high commodity prices.  In addition, Campbell Soup, given its superb brand loyalty has what most companies envy: pricing power.

Recommendation: Buy Campbell Soup Co (NYSE: CPB) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest Campbell Soup Co.

Source: Buy, Sell or Hold: Campbell Soup Co. (NYSE: CPB) Looks to Profit From its Recent Overseas Expansion