“In this difficult environment, more and more big companies are realizing that they have at least one quick and easy way to unlock value for their shareholders,” said Jim Cramer on CNBC’s “Mad Money.”
“Time and again, we’ve seen how a well thought out break up or spin off can send a stock soaring higher,” he continued. “So, when I see an iconic American brand that could benefit from a little break-up action, I can’t keep my mouth shut about it.”
Cramer was referring to ketchup and soup maker H. J. Heinz. He's long liked the company because it enjoys a “safe, defensive” business that can withstand an economic downturn while its stock pays a juicy dividend yield of 3.7 percent. In Cramer’s opinion, however, Heinz’s frozen food business is preventing its stock from achieving a higher valuation.
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While frozen food accounts for just 15 percent of Heinz’s total sales, Cramer thinks it’s holding back the entire company. During its analyst day on May 24, Heinz lowered its long-term guidance based on difficulties in its North American business, specifically in frozen food. In a recent conference call, CEO William Johnson revealed that the frozen food business is very cyclical, meaning it is “strong in good times and weak in recessionary times.”
“That’s the last thing you want in a food company as the entire reason to own a stock like Heinz is for its consistency,” Cramer said. “The whole point is that it should do as well in bad times as in good ones because people don’t stop eating just because the economy has slowed down.”
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Not only does Heinz’s frozen food business lack consistency, Cramer said it’s also had issues with execution. The company has not been able to pass costs onto the consumer, for example. A partnership with T.G.I. Friday’s to make frozen meals didn’t seem to pan out either, he noted.
Last week, Barclays issued a report entitled” Can Heinz Defrost a Better Multiple?” that suggested a break-up might not be that farfetched. Heinz management has not commented on a possible spin-off, but Cramer supports such an action.
“It’s time for Heinz to spin-off its frozen division as a separate company or find someone else to sell it to,” Cramer said, adding that the move would make it easier for Heinz to hit its 4 to 5 percent organic revenue growth target. “The break-up would rid the company of a struggling division so that Heinz can focus its innovation on faster growing categories domestically, and on rapidly expanding emerging markets, which have already become a big chunk of Heinz’s business, but would be even bigger, accounting for 30 percent of sales if they dumped the frozen foods division.”
Cramer thinks the move would also help Heinz earn a higher price-to-earnings multiple because fewer investors would be skeptical of the stock.
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