Pricing helps Heinz, Hormel hurt by turkey costs : US Business

By Brad Dorfman

CHICAGO (Reuters) - For U.S. food makers, pricing power and marketing muscle are making all the difference in a time of rising costs.

Two big names in the industry, ketchup manufacturer H.J. Heinz Co and Spam lunch meat maker Hormel Foods Corp both said on Thursday higher commodity costs have pressured their results.

But while strength overseas and price increases helped Heinz offset those costs and post a better-than-expected profit, soaring corn feed costs particularly hit Hormel, which also raises turkeys that it sells under the Jennie-O brand.

Heinz, shares of which have risen nearly 11 percent this year, has been one of the better-performing food companies as it benefits from its business overseas, new products in the United States and increased spending on marketing.

Heinz has also sold more products overall. Despite the price increases, volume rose 5 percent in the first quarter ended July 30.

Organic sales, which exclude currency fluctuations, rose 10.2 percent, J.P. Morgan Securities analyst Terry Bivens wrote in a research note.

"We believe this may be the strongest organic growth that the company has posted in the past decade," he said.

Heinz, which also makes a host of products including Ore-Ida potatoes and Smart Ones frozen meals, said its fiscal first-quarter profit rose to $229 million, or 72 cents a share, from $205.3 million, or 63 cents a share, a year earlier.

Analysts on average had forecast earnings of 66 cents a share, according to Reuters Estimates.

"Heinz executed strong volumes with pricing growth through a combination of innovation, value and increased consumer marketing," UBS analyst David Palmer said in a research note.

Heinz shares rose 0.6 percent to $52.03, while Hormel shares fell 0.9 percent to $34.84.

TOO MANY TURKEYS

Palmer, who rates Heinz shares "hold," said the company's results had positive implications for UBS's top food stock picks -- Campbell Soup Co , General Mills Inc and Kellogg Co , who also sell easily prepared foods but face less exposure to energy costs and currency changes.

He said Heinz's earnings "beat" was likely due to lower-than-expected taxes and interest expense.

Hormel said its earnings were hurt by an overabundance of turkey breast in the market, which weighed on selling prices.

The company, and others in the industry, are cutting back production to try to ease the glut, but that will take time.

"There's a couple more difficult quarters in front of these guys," Edward Jones food analyst Matt Arnold said. "It takes time for a supply response to actually work."

Hormel said earlier this month that it expected more pressure from that business in the current quarter.

For Hormel, profit fell to $51.9 million, or 38 cents a share, in the third quarter ended July 27, from $57.4 million, or 41 cents a share, a year earlier.

The results met analysts' average forecast and were in line with the company's August 8 outlook of 37 to 39 cents a share. Sales rose 10 percent to $1.68 billion, and volume increased 7 percent.

Profit fell 61 percent in the Jennie-O turkey business and dipped 1 percent in refrigerated foods. Grocery earnings rose 10 percent, helped by strength of Hormel and Stagg chilis.

The strength in chili, a lower-priced product, could be a sign of consumers trading down to save money, Arnold said.

"That's a category within packaged food that represents quite a bit of value and it is an affordable, valuable way of having an inexpensive meal," he said.

(Editing by Lisa Von Ahn and Gerald E. McCormick)

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