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H.J. Heinz Company (HNZ) Ketchup: Only Available on a Whopper Sandwich?

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On Feb. 14, news broke that Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) and partner 3G Capital Inc. would be purchasing the iconic American company H.J. Heinz Company (NYSE:HNZ). The $28 billion dollar deal represents a 20% premium to H.J. Heinz’s closing price from Feb. 13. Brazilian investment firm 3G Capital, which maintains controlling ownership of Burger King Worldwide Inc (NYSE:BKW), will be the operational partner going forward at America’s favorite ketchup company.

H.J. Heinz Company (NYSE:HNZ)Buffett praised the work that 3G Capital has done thus far at Burger King in widening its appeal among consumers and gaining traction in the competitive quick-service restaurant landscape. 3G purchased Burger King in October 2010, took the company private, and brought a tranche of the company public again in 2012 through a reverse merger transaction with billionaire investor Bill Ackman.

I was fortunate enough to begin my professional career by working at Burger King headquarters here in Miami directly out of college. 3G Capital implemented a hiring freeze, so I was brought in as an independent contractor, working in various roles within Accounting and Finance during 2011 and 2012.

3G Capital = Burger King + H.J. Heinz

How significant is 3G Capital’s acquisition of H.J. Heinz for the Burger King brand?

A good friend of mine who is studying law at the University of Virginia sent me a text message upon hearing the Heinz news and suggested good-humoredly that 3G Capital is now in a position to withhold America’s favorite ketchup from competitors McDonald’s Corporation (NYSE:MCD) and Wendy’s. All kidding aside, it turns out that the Wall Street Journal is reporting that Heinz’s discussions with 3G began at a dinner that Heinz CEO William Johnson originally thought was about Burger King, confirming the potential for further connectivity between the two brands.

Here are six reasons I believe Burger King’s stock is headed significantly higher:

  • The company outclassed Wall Street when it reported fourth quarter 2012 earnings on Feb. 15, sending the stock higher by more than 4% in a single trading session. Burger King posted $0.23 EPS vs. only $0.15 consensus, and revenue came in 8% higher than expected at $404.5 million vs. $375 million.
  • Free cash flow has increased more than 70% in the 21 months since the 3G acquisition. During the fourth quarter of 2010, free cash flow stood at $321 million. Fast forward to calendar 2012 and FCF has consistently exceeded $500 million per quarter.
  • Adjusted EBITDA margin has increased a massive 820 basis points to 33.2% during fiscal 2012 alone. This conveys that Burger King earns approximately $0.33 before taxes for every $1.00 in sales, compared to a prior $0.25 for every dollar.
  • System-wide sales increased 5.9% during calendar 2012 on a constant currency basis, on the back of the largest menu update in the brand’s history. 3G Capital has successfully introduced a higher-quality and broader menu, including new items such as chicken tenders, salad wraps, and fruit smoothies.
  • On Feb. 12, Burger King announced it is partnering with Seattle’s Best Coffee, which is owned by Starbucks Corporation (NASDAQ:SBUX), in an effort to double its coffee lineup. The new coffee menu will include 10 items, including flavored iced coffees and vanilla lattes.
  • The Wall Street community has become increasingly optimistic on Burger King, after having a moderately pessimistic attitude at the time of the June 2012 IPO. Citigroup initiated coverage of BKW on Dec. 13 with a Buy rating and $20 price target. I expect to see more analyst upgrades following the strong Q4 results.
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