Credit Suisse analysts have initiated coverage of Pinnacle Foods
) with an Outperform rating and a price target of $27 a share.
"We are initiating coverage on Pinnacle Foods with an Outperform
rating because we believe that it is uniquely positioned to create
value for shareholders by making acquisitions in the branded
packaged foods industry. Roll-ups merit more skepticism than
traditional consumer staples stocks because they fizzle badly if
the management team overpays for weak assets and put too much
strain on the balance sheet," said Credit Suisse.
"However, with its strong management team, solid portfolio of
brands, and disciplined approach toward deals, Pinnacle, in our
opinion, will follow in the footsteps of other successful roll-up
plays in food such as B&G Foods, TreeHouse Foods, and Ralcorp.
The low borrowing cost environment makes this an ideal time for
Pinnacle to explore transactions."
Favorable Environment for Acquisitions
"We believe that Pinnacle's largest competitors in the frozen
foods and dry goods categories will explore divestitures in the
near term to midterm, thus providing more optionality for Pinnacle
management's acquisition strategy. Heinz's North American frozen
business would be a good fit for Pinnacle, as would several brands
in the Kraft Foods portfolio. Kraft and Nestle are not sellers
today, but they could be in the years ahead as they implement new
portfolio management strategies with ROIC focus. As a small-cap
public company, Pinnacle is in position to conduct a Reverse Morris
Trust transaction in the frozen category that would relieve the
seller of paying capital gains taxes."
"Our $27 target price is based on a 10.7x EV/EBITDA multiple
against our 2014 EBITDA estimate, which may seem a bit high, given
it represents a 13% premium versus its peer group. However, this
stock appears very cheap on a price to free cash flow basis,
trading at a 40% discount to its peer group (CY14). This implies
that the market has yet to give Pinnacle much credit for the high
returns that it can generate for shareholders by redeploying its
cash flow into high-return projects, in our view."
Shares of PF are up 0.25% to $23.99 in mid-day trade, and are
within a 52-week range of $22.15 - $24.80.
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