Takeover may be the only thing that spices up Heinz

Dear Mr. Berko:

I’ve been watching Heinz, and in the past nine months I’ve noticed that the stock has not kept pace with the market. I might consider buying 500 shares as a short-term position if you think the stock is undervalued and might rise to the low $40s in the next six to 12 months. Please tell me what you think.

D.L., Fort Walton Beach, Fla.

Dear D.L.:

In 1996 and 1997, Heinz (HNZ-$34) posted $9.2 billion in gross revenues. In 1998 and 1999 those revenues rose slightly to $9.3 billion. Since then, they have continued to enjoy their moribund status, rising to $9.4 billion in 2000 and staying there in 2001 and 2002.

Realizing this, management decided to divest itself of some underperforming assets, including its pet food business, its branded tuna fish label, its infant feeding line and its private soup labels.

With a little bit of luck, HNZ should post $8.2 billion in revenues this year. Meanwhile, revenues from its frozen food labels have been under pressure, and some of its new products, including Hot Bites and Boston Market Homestyle, among others, are selling poorly.

Heinz is getting skinned in its potato business and its food service operations continue to starve the company’s profit line. Other products seem to be in transition phases. Unit volume is declining and lower prices have not increased revenues.

HNZ’s return on assets and the company’s return on investment is humiliatingly lower than the industry average. Its revenue per employee of $177,000 and net income per employee of $12,000 is half the industry average of $320,000 and $23,000, respectively.

Meanwhile, receivable turnover, inventory turnover and asset turnover is nearly 50 percent below industry average. Finally, HNZ’s revenue growth and earnings growth are shameful compared to the industry averages.

This company, which has devised some of the finest and most popular products on the planet, may have an extremely serious management problem.

The stock doesn’t tick my clock. After 20 years of consecutive dividend increases, HNZ’s board of directors slashed its dividend to $1.08 this year from $1.62 last year. According to Value Line’s Jeffrey Levit, there’s little chance of an increase for at least four or five years.

A close acquaintance who is a very low-level big shot at Hormel tells us that HNZ’s negative momentum during the past five years is probably carved in stone. He insists that because HNZ is in such a state of irreparable flux that there are only two solutions: Immediately behead current management and the entire board of directors and hire Lee Iacocca to run the company or sell out to a competitor.

This year, HNZ has dwindled from $58 to $29, which is the lowest those shares have traded since 1994. I would be uncomfortable buying 500 shares as a quality long-term investment.

I would, however, consider owning 500 shares as a short-term speculation based on the possibility that the company’s significant and easily recognizable weakness might attract some hungry takeover sharks. In fact, some suits on Wall Street think that HNZ might be worth $50 a share if a competitor like Nestle were to make an offer.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.