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Coverage Initiation: Pinnacle Foods
Value Line has initiated coverage of Pinnacle Foods (PF) in its flagship product, The Value Line Investment Survey. The name of the company probably isn’t familiar to most supermarket shoppers, but many of Pinnacle Foods’ brands are well-known, with an 85% household penetration. The company aims to reinvigorate “iconic” brands that somehow lost their way under previous ownership. Among these brands are Duncan Hines, Mrs. Paul’s, and Birds Eye. Pinnacle Foods has the number one or number two market share in 10 of its 12 product categories. The company’s sales in 2012 were $2.5 billion.
Pinnacle Foods was founded in 2001 through an acquisition that brought it the Vlasic, Hungry-Man, and Open Pit brands, and the company has grown through mergers and acquisitions since then. In 2004, it merged with Aurora Foods, which brought it the Duncan Hines, Mrs. Butterworth’s, Log Cabin, Lender’s, Mrs. Paul’s, Van deKamp, Celeste, and Aunt Jemima brands. The purchase of Birds Eye Foods came in 2009. The private-equity owner of Pinnacle Foods, The Blackstone Group (BX), sold a minority stake (roughly one third) in the company through an initial public offering in 2013, and its shares began trading on the New York Stock Exchange on March 28th. At the start of October, the company completed the purchase of Wish-Bone salad dressings for $575 million in cash.
What does Pinnacle Foods do once it acquires its brands? With Duncan Hines, it is using social media to build a “baker’s club” (i.e., a community of bakers). With Mrs. Butterworth’s, it is using the wraps around the bottle for promotional tie-ins, such as with Sea World and Busch Gardens. With these and other brands, the company has broadened its product lines through the use of its research and development facility at its corporate headquarters in Parsippany, NJ. Two examples are Farmer’s Garden pickles by Vlasic and Recipe Ready frozen vegetables by Birds Eye. On the cost side, Pinnacle Foods is saving $28 million annually through supply chain consolidation.
Pinnacle Foods’ cash flow is solid. The company will benefit from $1.1 billion of tax-loss carryforwards through 2015. Some cash—including the $667 million in proceeds from its IPO earlier this year—is being used for debt reduction. (Pinnacle Foods will borrow money for acquisitions, such as the aforementioned purchase of Wish-Bone.) The company is paying a common dividend, and its board of directors is targeting a 50% payout ratio. In mid-October, this stock was yielding 2.7%, which is moderately above the market median. The equity is suitable for income-oriented investors.
Although stocks of food processors are often known for their defensive characteristics, this issue might not be suitable for conservative accounts. The company is leveraged, with long-term debt making up more than half of its total capitalization. Also, it is unknown how this equity will fare in a bear market due to its short trading history. A high level of competition might prevent Pinnacle Foods from passing its food costs on to customers. And any company that grows via acquisition runs the risk of making a bad deal. Finally, investors should be aware that Blackstone continues to own a majority of the stock, so any large sales could put pressure on the stock price.
For a more thorough look at Pinnacle Foods, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.