Pinnacle Foods (PF), Zacks Rank #1 (Strong Buy), manufactures, markets, and distributes branded food products. Its brands are well known by consumers and include the Birds Eye, Duncan Hines, and Mrs. Paul’s product lines. It recently acquired Wish Bone, adding to the mix of strong brand names. The company says that its products are found in 85% of American homes and are category leaders, holding a number one or number two market share position in ten of twelve category offerings.
Earnings estimates are rising:
Analysts are optimistic about the earnings outlook for Pinnacle. Over the last 60 days, earnings estimates have been revised up six times. The Zacks 2013 and 2014 Consensus Earnings per Share Estimates have increased $.02 to $1.55 and $.07 to $1.73 respectively. Earnings per share are expected to expand 11.6% in 2014.
Valuation is attractive:
Pinnacle Foods is priced at 15.4 times 12 month forward earnings and at a discount to its peer group which is trading at 16.1 times 12 month forward earnings. Likewise, its PEG ratio is 1.16 compared to 1.92 for the peer group. The market is paying only a slight premium for earnings growth.
Pinnacle pays a respectable dividend:
Pinnacle has a dividend yield of 2.75% which is competitive to the 10 year treasury yield. The company is targeting a payout ratio of 50% which leaves cushion for future increases.
The company has also strongly grown free cash flow in recent years. Free cash flow has risen from $88 mln in 2009 to $173 mln last year and posted a 25% compounded annual growth rate over the three year period. The strength of free cash flow should be supportive to the dividend and future growth opportunities.
Looking under the hood, the company has a net operating loss which can be applied to future profits to reduce cash taxes. 75% of the loss is expected to be utilized through 2015.
Pinnacle has reduced its leverage ratio (net debt dividend by earnings before interest, taxes, depreciation, and amortization) from 7.7x in 2008 to 4.2x in June of 2013. The company was recently able to refinance some debt and is touting an annual interest savings of $100 mln in the wake of recent capital structure changes.
Pinnacle’s stock has been correcting and may be approaching technical support:
After a run up post its March IPO, Pinnacle has set back in recent weeks and is approaching potential chart support level in the $25 area. The correction from $28.50 has taken some of the excess post the IPO out of valuation and may set up an attractive entry level.
Marketing via the Internet:
Pinnacle is using social media to build brand recognition and use. Its Duncan Hines Community has seen members grow 367% since January 2012 and is approaching 2 mln. A solid marketing plan complements the favorable trend in earnings estimate revisions and inexpensive valuation.
Conclusion:
Put Pinnacle at the top of your shopping list. This stock may offer your portfolio stability, growth opportunity, and income during a period when political events in Washington make investors uneasy about the economic outlook.
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