Analyst Actions: Credit Suisse Initiates Pinnacle Foods With Outperform, $27 PT; Shares Edge Up

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Credit Suisse analysts have initiated coverage of Pinnacle Foods Inc. ( PF ) 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."

Valuation

"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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

Referenced Stocks: PF

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