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This IPO May Have Already Reached Its Pinnacle

By Jacob Roche - Apr 6, 2013 at 11:15AM

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Pinnacle Foods bursts out of the gate, but investors may be getting ahead of themselves.

Recently, Pinnacle Foods (NYSE: PF) held its initial public offering, priced at $20 per share, at the high end of the expected range. The IPO brought in a net $627 million for the company, and the stock has continued to trade up a bit. Now that the typical IPO dust is settling, however, it may be worth taking a look.

Hungry investors
Pinnacle is the owner of brands including Vlasic, Mrs. Butterworth's, and Hungry Man -- brands that are as conventional as they are iconic. You aren't going to find much in the way of all-natural Mrs. Butterworth's maple syrup, organic Vlasic pickles, or cage-free Hungry Man chicken dinners. Surprisingly, though, Pinnacle has increased sales over the past few years at a rate befitting some of the trendiest grocery categories. At nearly 60% sales growth since 2008, Pinnacle is outpacing even the vaunted Whole Foods Market and certainly all of the major conventional grocers:


2008 Revenues (in Billions)

2012 Revenues






Pinnacle Foods












Whole Foods Market




Source: Company filings.

While conventional grocers have a host of problems, one of the big ones is a long-term trend of strong growth in organic food and stagnant growth for conventional products. From 2000 to 2010, organic food sales more than quadrupled, while total food sales grew by only 35%.

It's clear that this isn't just a problem with the grocery stores themselves. Dean Foods (DF), essentially the Pinnacle Foods of milk products, had flat sales growth from 2007 to 2011, just like conventional grocers. White Wave Foods, Dean's former organic milk subsidiary and recent spinoff, had impressive 64% growth during that time.

Possibly more of a nadir
Given the trends in the industry, it seems almost too good to be true that Pinnacle could have such impressive growth. Unfortunately, it is.

Digging a little deeper, there are signs of stagnation at Pinnacle. The jump in sales largely occurred in 2010 as a result of its Bird's Eye acquisition. Sales were flat in the two years prior and have been flat since the acquisition, which was expensive as well. Pinnacle paid $1.3 billion for Bird's Eye and took on the $700 million in debt Bird's Eye held.

Unfortunately, most of Pinnacle's sales growth has been for naught, as its debt burden has grown at almost the same pace. Pinnacle's interest expenses have eaten up almost all of its operating profits over the past few years and led to losses in 2008 and 2011.

The point of the IPO, in fact, was to raise cash to help pay down the company's $2.6 billion in debt. The IPO money will bring that total down to just under $2 billion, which is still substantial. However, if interest expenses go down, Pinnacle may be able to reap some profits.

The Foolish bottom line
Out of the gate, Pinnacle is trading at close to $25 per share, a big gain over the IPO pricing. At a P/E of 40, the stock isn't cheap, but management has committed itself to a $0.18 quarterly dividend, which works out to a healthy yield of about 2.9%. Management claims the dividend is its highest priority, but given Pinnacle's debt burden, that has me nervous. The company's highest priority should be establishing a healthier balance sheet before it starts writing checks it might not be able to cash later on.

It may be a smart idea to add Pinnacle Foods to My Watchlist to see if the company's situation improves over its first few public quarters.

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