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North America Equity Research

26 November 2012

Neutral
H.J. Heinz Co. HNZ, HNZ US
Price: $58.43
Tough to Fly When the Fog Is Thick ▲ Price Target: $58.00
Previous: $52.00

Following last week’s earnings, we maintain our Neutral rating on Heinz. We see Food Manufacturing and Retail
Heinz as a “true Neutral”, a stock that because of its dividend yield probably has AC
Ken Goldman
limited downside, but because of its higher multiple may have minimal upside too
(1-212) 622-0359
(at least in the near term). We are raising our target price to $58 from $52 merely [email protected]
to reflect the shift in our target price date to December 2013 from December 2012.
J.P. Morgan Securities LLC
Thus, though we are not negative on Heinz, we think over the next 12 months
investors are likely to find better total shareholder return in names such as Price Performance
Mondelēz (MDLZ), ConAgra (CAG), and Smucker (SJM), all Overweight rated. 64

And as HNZ CEO Bill Johnson suggested last week, there is a great deal of fog 60

facing the company at the moment. $ 56

52
 Near-term downside risk probably minimized by the dividend yield (for
48
now). Between the aging US population and lingering uncertainty on the Street Nov-11 Feb-12 May-12 Aug-12 Nov-12
about the market’s direction (as perhaps evidenced by the relative lack of HNZ share price ($)
S&P500 (rebased)
trading volume versus prior years), dividend-paying stocks should remain
YTD 1m 3m 12m
attractive to many investors, in our opinion. Thus, assuming that the tax rate Abs 8.1% 2.4% 5.3% 17.1%
does not rise dramatically, we believe dividends will continue to be an Rel -4.0% 2.7% 4.8% -4.2%

important determinant of food stock valuations. At 3.5%, Heinz has one of the
more attractive dividend yields in the group. Indeed, with over $1B in cash on
its balance sheet and still-solid cash flows, we are not certain why Heinz does
not raise its payout ratio by a greater degree. Perhaps the company is waiting for
the proverbial fiscal cliff issue to be resolved (in fact, Mr. Johnson reiterated last
week his belief that dividends are still the best way to give cash back to
shareholders).
 Near-term upside potential probably limited by the multiple. Heinz is
trading at a 15.4x multiple on FY14E EPS, near the middle of the pack among
consumer staple stocks. But this places it near companies like Coca-Cola (KO –
Overweight-rated, covered by J.P. Morgan Beverages analyst John Faucher).
The P/E also is above such names as J.M. Smucker (SJM – Overweight, which
we think has less uncertainty than HNZ right now), Kraft Foods Group (KRFT –
Neutral, which has a more attractive dividend yield and no overseas risk),
Mondelēz (MDLZ – Overweight, which has superior emerging markets
exposure than HNZ and in our view plays in better categories overall), and
ConAgra (CAG – Overweight, which is more challenged than HNZ in numerous
fundamental ways but recently has been growing EBITDA at a faster clip).

H.J. Heinz Co. (HNZ;HNZ US)

FYE Apr 2011A 2012A 2013E 2013E 2014E 2014E Company Data
(Prev) (Curr) (Prev) (Curr) Price ($) 58.43
EPS (Operating) ($) Date Of Price 23 Nov 12
Q1 (Jul) 0.75 0.79 0.87A 0.87A 0.85 0.88 52-week Range ($) 58.86 - 49.75
Q2 (Oct) 0.78 0.81 0.85 0.90A 0.88 0.86 Mkt Cap ($ bn) 18.86
Q3 (Jan) 0.84 0.95 0.94 0.91 1.09 1.02 Fiscal Year End Apr
Q4 (Apr) 0.71 0.81 0.86 0.86 1.01 1.02 Shares O/S (mn) 323
FY 3.07 3.36 3.51 3.53 3.82 3.77 Price Target ($) 58.00
Bloomberg EPS FY ($) 3.09 3.34 - 3.54 - 3.79 Price Target End Date 31 Dec 13
Source: Company reports, Bloomberg and J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg
consensus estimates.

See page 4 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.

www.morganmarkets.com
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Ken Goldman North America Equity Research
(1-212) 622-0359 26 November 2012
[email protected]

 We see little room for Heinz’s P/E multiple to expand, and we think that
the 10.5x EV/EBITDA multiple may actually be slightly inflated given the
lack of operating growth in recent years. Heinz has grown EBITDA by a
CAGR of 2.9% over the last 10 years. While we appreciate that comparing
FY03 to FY13E is not fully apples-to-apples, this growth is not enough, in
our view, to justify an EBITDA multiple over 10x.

 Tough to fly when the fog is thick. When asked last week about whether
he would add more to spending on marketing or other projects, Mr. Johnson
said he is “dealing with a world right now that [he] can’t figure out” thanks
to the fiscal cliff, Europe, currency, US consumer confidence, etc. We
appreciate his candor and do not disagree with his stance; indeed we think a
bit of prudence may be smart right now. But if the skies in front of HNZ are
so foggy at the moment, then perhaps investors should take a short-term
breather until they clear a bit. Keep in mind that HNZ has outperformed the
packaged food group and the SPX since the midpoint of 2012 (+7.4%
versus +3.6% and +3.4%, respectively), which is why despite the
company’s EBITDA growth issues the stock’s multiple has expanded.
 Adjusting estimates. We are boosting FY13E to $3.53 from $3.51 to
account for the 2Q beat. We are reducing FY14E to $3.77 from $3.82 as we
now model a bit less gross margin growth because of commodity inflation.
 Investment thesis. We are Neutral the HNZ shares. Though we respect the
company’s strategy to spend more on marketing and we like the emerging
markets exposure, we find better opportunities to capitalize on dividends
(KRFT) and emerging markets (MDLZ) elsewhere in our universe. We
think the stock will probably put forth a total shareholder return somewhere
in the middle of the pack of our coverage in CY13.
 Valuation. We employ a 50/50 P/E EV/EBITDA methodology when
valuing packaged food stocks. We believe that given the company’s
roughly industry-average growth over the last decade or so, the multiples
should trade roughly in-line with the current group averages of 16.0x P/E
and 9.5x EV/EBITDA on NTM estimates. Using P/E and our CY14E EPS
estimate of $3.96, we come to fair value as of Dec-13 of $63. Using
EV/EBITDA and our CY14E EBITDA estimate (plus income from non-
controlling interests) of $2.2B, we come to fair value as of Dec-13 of $54.
The average of these two figures is ~$58 and thus we establish a Dec-13
price target of $58, versus our previous Dec-12 target of $52.
 Risks to rating and price target. Upside: 1) Commodity costs could fall,
2) the US government may not raise the dividend tax rate by much, and 3)
marketing spending may improve sales by a greater degree than we model.
Downside: 1) Commodity costs could rise, 2) the US government may raise
the dividend tax rate by a large degree, and 3) marketing spending may
improve sales by a smaller amount than we model.

2
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Ken Goldman North America Equity Research

(1-212) 622-0359 26 November 2012
[email protected]

H.J. Heinz Co.: Summary of Financials

Income Statement - Annual FY12A FY13E FY14E Income Statement - Quarterly 1Q13A 2Q13A 3Q13E 4Q13E
Revenues 11,576 11,821 12,330 Revenues 2,791A 2,827A 3,029 3,174
Cost of Revenues 7,444 7,569 7,919 Cost of Revenues 1,789A 1,814A 1,905 2,061
Gross Profit 4,132 4,252 4,411 Gross Profit 1,002A 1,013A 1,124 1,113
Other Operating Expenses - - - Other Operating Expenses - - - -
Operating Income 1,679 1,702 1,749 Operating Income 410A 392A 452 448
EBITDA 2,014 2,043 2,101 EBITDA 495A 478A 537 533
Interest, Net 259 252 229 Interest, Net 65A 62A 63 63
Pretax Income 1,411 1,441 1,512 Pretax Income 348A 323A 387 383
Taxes 309 289 302 Taxes 62A 31A 93 103
Tax Rate 21.9% 20.1% 20.0% Tax Rate 17.7%A 9.6%A 24.0% 27.0%
Net income - operating 1,086 1,137 1,194 Net income - operating 279A 289A 291 277
Diluted Shares Outstanding 323 322 316 Diluted Shares Outstanding 323A 323A 322 320
Operating EPS 3.36 3.53 3.77 Operating EPS 0.87A 0.90A 0.91 0.86
Balance Sheet and Cash Flow Data FY12A FY13E FY14E Ratio Analysis and Valuation FY12A FY13E FY14E
Cash and Equivalents 1,330 1,083 600 Gross Margin 35.7% 36.0% 35.8%
Accounts Receivable 994 1,238 1,286 SGA/sales 21.2% 21.6% 21.6%
Inventories 1,329 1,443 1,501 EBIT Margin 14.5% 14.4% 14.2%
Current Assets 3,882 4,009 3,633 EBITDA Margin 17.4% 17.3% 17.0%
PP&E 2,484 2,478 2,612 EBITDA Growth 3.1% 1.4% 2.8%
Goodwill 3,186 3,134 3,134 EBIT Growth 1.4% 1.4% 2.8%
Intangibles 408 392 392 Net income growth - operating 9.4% 4.7% 5.0%
Total Assets 11,983 12,059 11,818 EPS growth - operating 9.3% 5.2% 6.9%
Short-term Debt 247 916 916 Core operating cycle (days) - - -
Current Liabilities 2,648 3,337 3,391 Working capital as % of sales 10.7% 5.7% 2.0%
Long-term Debt 4,780 4,126 3,584 Net debt 3,696 3,958 3,900
Total Liabilities 9,059 9,016 8,528 Net debt/EBITDA 1.8 1.9 1.9
Net debt/Capital 46.5% 49.0% 50.1%
Shareholders' Equity 2,925 3,044 3,289
Net Income (including charges) 940 1,124 1,194
D&A 343 341 352
Other adjustments
Changes in Working Capital 195 (374) (53)
Cash flow from Operations 1,493 1,035 1,492
Capex 419 359 440
Free Cash Flow 1,074 676 1,052
Free Cash Flow/Share 3.32 2.10 3.33
Cash from Investing (402) (334) (440)
Casn from Financing (363) (906) (1,535)
Share buybacks 202 230 300
Dividends 619 668 694
Source: Company reports and J.P. Morgan estimates.
Note: $ in millions (except per-share data).Fiscal year ends Apr

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(1-212) 622-0359 26 November 2012
[email protected]

Other Companies Recommended in This Report (all prices in this report as of market close on 23 November 2012)
ConAgra Foods (CAG/$28.41/Overweight), J.M. Smucker Co. (SJM/$86.05/Overweight), Kraft Foods Group
(KRFT/$45.28/Neutral), Mondelēz International, Inc. (MDLZ/$25.62/Overweight)
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.
Important Disclosures

 Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for H.J. Heinz
Co., Mondelēz International, Inc., ConAgra Foods, Kraft Foods Group within the past 12 months.
 Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: H.J. Heinz Co., Mondelēz
International, Inc., ConAgra Foods, J.M. Smucker Co., Kraft Foods Group.
 Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: H.J. Heinz Co., Mondelēz International, Inc., ConAgra Foods, J.M. Smucker Co., Kraft Foods Group.
 Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: H.J. Heinz Co., Mondelēz
International, Inc., ConAgra Foods, J.M. Smucker Co., Kraft Foods Group.
 Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: H.J. Heinz Co., Mondelēz International, Inc., ConAgra Foods, J.M. Smucker Co.,
Kraft Foods Group.
 Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking H.J. Heinz
Co., Mondelēz International, Inc., ConAgra Foods, J.M. Smucker Co., Kraft Foods Group.
 Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from H.J. Heinz Co., Mondelēz International, Inc., ConAgra Foods, J.M. Smucker Co., Kraft Foods
Group.
 Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from H.J. Heinz Co., Mondelēz International, Inc., ConAgra Foods, J.M. Smucker Co., Kraft Foods Group.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–
covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing
[email protected] with your request.

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Ken Goldman North America Equity Research

(1-212) 622-0359 26 November 2012
[email protected]

H.J. Heinz Co. (HNZ, HNZ US) Price Chart

OW $43.5 OW $57 Date Rating Share Price Price Target

90 ($) ($)
01-Dec-06 N 44.45 -
OW $45 OW $60 N $56
75 02-Jun-08 OW 49.91 55.00
N OW $55OW $52 OW $46.5
OW $48.5 OW $54 OW $59
N $52 17-Nov-08 OW 41.02 52.00
60
24-Feb-09 OW 31.97 45.00
Price($) 29-May-09 OW 36.16 43.50
45
14-Oct-09 OW 40.17 46.50
25-Feb-10 OW 45.92 48.50
30
03-Mar-11 OW 48.98 54.00
27-May-11 OW 54.68 60.00
15
24-Aug-11 OW 51.47 57.00
23-May-12 OW 53.86 59.00
0
25-May-12 N 53.50 56.00
Oct Jul Apr Jan Oct Jul Apr Jan Oct
06 07 08 09 09 10 11 12 12 04-Sep-12 N 55.96 52.00

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Dec 01, 2006.

Mondel?z International, Inc. (MDLZ, MDLZ US) Price Chart

45

36

OW $31
27
Price($)
Date Rating Share Price Price Target
($) ($)
18 01-Oct-12 OW 27.82 31.00

0
Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
09 10 10 10 10 11 11 11 11 12 12 12 12

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Oct 01, 2012.

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Ken Goldman North America Equity Research

(1-212) 622-0359 26 November 2012
[email protected]

ConAgra Foods (CAG, CAG US) Price Chart

N $17.5 OW $29 Date Rating Share Price Price Target

45
($) ($)
N N $25 N $26 N $29 02-Jun-08 OW 23.58 26.00
36 03-Sep-08 N 19.63 --
OW $26 N $20 N $26.5 N $23 N $28 OW $32 17-Nov-08 N 15.18 17.50
26-Jun-09 N 19.34 20.00
Price($) 27
18-Sep-09 N 22.15 25.00
25-Mar-10 N 26.10 26.50
18
22-Sep-10 N 21.42 23.00
22-Dec-10 N 22.49 26.00
9
19-Mar-12 N 26.36 28.00
22-Jun-12 N 25.26 29.00
0 04-Sep-12 OW 25.65 29.00
Oct Jul Apr Jan Oct Jul Apr Jan Oct 01-Oct-12 OW 27.77 32.00
06 07 08 09 09 10 11 12 12

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Sep 03, 2008 - Nov 17, 2008.

J.M. Smucker Co. (SJM, SJM US) Price Chart

Date Rating Share Price Price Target
($) ($)
13-Oct-09 N 53.73 59.00
138 OW $66 OW $71 OW $83 OW $90 OW $99
23-Nov-09 OW 56.35 65.00
25-Feb-10 OW 58.67 66.00
115 OW $65 OW $70 OW $82OW $86
OW $86OW $89
18-Jun-10 OW 61.55 74.00
N $59 OW $74 OW $72 OW $79 OW $83
OW $84 23-Aug-10 OW 59.79 70.00
92
19-Nov-10 OW 62.23 71.00
Price($) 18-Feb-11 OW 67.33 72.00
69
16-May-11 OW 76.71 82.00
09-Jun-11 OW 76.39 83.00
46
22-Aug-11 OW 67.76 79.00
24-Oct-11 OW 76.52 86.00
23
17-Feb-12 OW 73.07 83.00
12-Mar-12 OW 75.46 86.00
0
11-Apr-12 OW 79.79 90.00
Oct Jul Apr Jan Oct Jul Apr Jan Oct
06 07 08 09 09 10 11 12 12 08-Jun-12 OW 75.75 84.00
04-Sep-12 OW 86.04 89.00
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Oct 13, 2009. 15-Nov-12 OW 85.38 99.00

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Ken Goldman North America Equity Research

(1-212) 622-0359 26 November 2012
[email protected]

Kraft Foods Group (KRFT, KRFT US) Price Chart

72

63

54
N $47
45
Price($)
36 Date Rating Share Price Price Target
($) ($)
27 01-Oct-12 N 44.10 47.00

18

0
Sep Sep Sep Sep Oct Oct Oct Nov Nov Nov
12 12 12 12 12 12 12 12 12 12

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Oct 01, 2012.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research
website, www.morganmarkets.com.
Coverage Universe: Goldman, Ken: Annie's, Inc. (BNNY), Campbell Soup Company (CPB), ConAgra Foods (CAG), Dean Foods
(DF), General Mills (GIS), H.J. Heinz Co. (HNZ), Hain Celestial Group (HAIN), Hershey (HSY), Hillshire Brands (HSH), J.M. Smucker
Co. (SJM), Kellogg (K), Kraft Foods Group (KRFT), Kroger (KR), McCormick & Co., Inc. (MKC), Mead Johnson Nutrition (MJN),
Mondelēz International, Inc. (MDLZ), Roundy's (RNDY), SUPERVALU (SVU), Safeway (SWY), Sanderson Farms, Inc. (SAFM),
Smithfield Foods, Inc. (SFD), The Fresh Market (TFM), TreeHouse Foods Inc. (THS), Tyson Foods (TSN), Whole Foods Market (WFM)

J.P. Morgan Equity Research Ratings Distribution, as of September 28, 2012

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 44% 44% 12%
IB clients* 52% 46% 34%
JPMS Equity Research Coverage 42% 48% 10%
IB clients* 69% 61% 53%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst
or your J.P. Morgan representative, or email [email protected].

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Ken Goldman North America Equity Research

(1-212) 622-0359 26 November 2012
[email protected]

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

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8
This document is being provided for the exclusive use of SAM NICHOLS at FREE TRIAL

Ken Goldman North America Equity Research

(1-212) 622-0359 26 November 2012
[email protected]

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