Why Pinnacle Foods’ Solid Performance Should Continue

Pinnacle Foods (NYSE: PF  ) has outperformed the S&P 500 this year. The company reported in-line fourth-quarter results and an in-line outlook. Also, its shares received a boost when analyst firm Stifel Nicolaus raised its price target on Pinnacle shares to $31. Impressively, Pinnacle has done well even though it faces competition from bigger peers such as General Mills (NYSE: GIS  ) and B&G Foods (NYSE: BGS  ) .

Moreover, Pinnacle expects acquisitions such as Wish-Bone, which it acquired from Unilever, to boost its future performance. Let's take a look at Pinnacle's results and see how the company might perform in the future. 

Robust performance
Pinnacle's consolidated net sales rose 0.6% year-over-year, while comparable sales grew 2%. Similarly, gross margin increased 1.9%, which resulted in double-digit EBIT growth for the last fiscal year. Also, earnings rose to $1.57 per share to come in at the high end of Pinnacle's guidance. Going forward, management expects double-digit growth in earnings for 2014, supported by the incremental benefit from the Wish-Bone acquisition. 

Pinnacle saw strong performance across its various categories which has led to market share growth. It also benefited from reduced interest expenses after its IPO and the subsequent refinancing. As a result its earnings per share grew.  

Pinnacle's acquisition of Wish-Bone has proven to be a great advantage, although its market share saw pressure as promotional activities declined. However, Wish-Bone contributed $0.02 per share to Pinnacle's earnings in the fourth quarter. The company's development plans for Wish-Bone may not reflect positive results for the first quarter, but management expects the acquisition to become accretive by the second half of the fiscal year. 

The way forward
Pinnacle turned in a strong North American performance as it enjoyed higher margins. Its leading brands such as Birds Eye, Voila, and Birds Eye Vegetables led its North American growth. The food maker also launched a new line of products known as Recipe Ready, which is a blend of vegetables designed for faster preparation. Recipe Ready received the title of one of the top 25 best packaged foods in 2014 from Parents Magazine for its great taste and nutrition. It goes without saying that Pinnacle will continue to promote Recipe Ready aggressively this fiscal year.

As for the grocery division, the company expects Wish-Bone to drive sales here, along with contributions from Log Cabin, Mrs. Butterworth's syrups, and Vlasic pickles. The Duncan Hines baking business has also improved because the company made more investments in the brand and added new seasonal varieties such as Velvet seasonal cake. 

Pinnacle also expanded the Farmer's Garden line, which has resulted in the growth of its Vlasic business. Farmer's Garden has proven to be good for the Vlasic brand, as it has attracted new customers.  Pinnacle has also focused on productivity savings. It has launched a new program known as MVP, or maximizing value through productivity, which enables the company to deliver consistently strong results. As a result of program, total productivity savings made up 4% of the cost of products sold in 2013. Increased productivity and improved product mix led to a 1.9% increase in gross margins.

Comparing with peers
Pinnacle is a small player in an industry dominated by the likes of General Mills. However, it looks like General Mills hasn't gotten much traction from its recent moves. In the just-reported third quarter, General Mills' earnings fell 6% because its sales declined in the U.S. Moreover, the company's performance wasn't helped by its GMO-free Cheerios, which do not contain genetically modified organisms, despite significant investments in this initiative. Since Pinnacle's own packaged-foods brands such as Ready Recipe have gained steam, this company could continue to gain market share. 

Also, rival B&G Foods' performance in the previous quarter wasn't up to the mark. B&G had to spend heavily on promotional activity to push sales, and this pressurized earnings in the process. Even then, B&G's brands such as B&M didn't yield good results relative to what the company spent on promotional activity. Thus, it looks like Pinnacle has executed better than its peers and hence, it posted 27.6% growth in earnings for the previous quarter.

Bottom line
With all that said, Pinnacle is expensive at a trailing P/E of 35.4. However, a low forward P/E of 15.2 and superior earnings growth make Pinnacle worth the premium. It has done a good job in its first year as a public company and it has set itself up nicely for better performance going forward. Investors should definitely look at Pinnacle for their portfolios.

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