On March 4, ahead of its March 6 earnings announcement, I wrote a piece outlining the current condition of Pinnacle Foods (NYSE: PF) after it became a public company again in 2013. Now that the company has released its earnings and there has been time to digest and analyze the release, I wanted to look back and see if the earlier points I made remain valid.
The previous article stated, in short, that Pinnacle had an extremely large debt load and low margins. However, EBITDA had been growing and estimates called for the company to earn $1.53-$1.57 per share in 2013, excluding certain items.
The numbers
Pinnacle performed well in 2013 with earnings of $1.57 per share, which came in at the high end of the estimate. It is important to note that this is an adjusted, non-GAAP measure, as the company has stripped out many charges related to the restructuring that will not affect business moving forward. However, taking everything into account, GAAP reported earnings for the year stood at $89.3 million or $0.82 per share, which still shows a healthy rise from Pinnacle's 2012 earnings of $52.5 million or $0.61 per share .
Adjusted EBITDA, another non-GAAP financial measure, continued to grow in 2013 with a rise to $460 million from $426 million in 2012. EBITDA helps us measure a company's operating efficiency, as it factors out non-operating expenses such as taxes, interest, depreciation, and amortization.
EBITDA serves as a good measure when we analyze companies, but we still cannot ignore those non-operating expenses. The previous article included plenty of concern over Pinnacle's long-term debt and interest expenses. Taking a look through the 2013 income statement we find that interest expense fell by over 30% from 2012 and interest no longer made up the largest line-item expense on the income statement. The lower interest expense, which resulted from the capital restructuring that occurred at the IPO, has helped widen Pinnacle's profit margin.
Pinnacle's profit margin has also been a problem in recent years. In 2013 Pinnacle's operating margin rose to 3.6%, a very promising figure in comparison with its 2012 profit margin of 2.1%.
Comparability
In the previous article, we compared Pinnacle to J.M. Smucker (SJM 0.11%) and B&G Foods (BGS 0.85%). Smucker and B&G Foods have profit margins of around 8% and 5%, respectively . Pinnacle remains far shy of these numbers; however the company made a large leap toward its competitors by cutting its interest expense. As the company pays down debt and normalizes its operations, I believe Pinnacle will report a profit margin more comparable to those of its competitors.
In the report, Pinnacle's management also gave EPS guidance for fiscal-year 2014 of $1.75-$1.80, which equates to a forward price-to-earnings ratio of around 16 to 16.5. By this measure the market has priced Pinnacle fairly in respect to its EPS growth expectations, as Smucker and B&G Foods trade at 15.3 and 16.3 times forward earnings, respectively
Forward looking
I still believe that Pinnacle remains on the right track to become a strong company in its industry. Pinnacle has been working to increase its efficiency, pay down its debt, and grow its business. Along with that, the current market pricing looks fair for a piece of this company.
Pinnacle increased its profit margin significantly in 2013, which offers a good sign for this company moving forward. The company also decreased its long-term debt; long-term debt now stands at $2.4 billion or 1.55 as a ratio of long-term debt to equity. In the fourth quarter of 2013 Pinnacle also acquired the Wish-Bone salad dressing brand and the acquisition had an immediate positive impact on EPS, with a contribution of $0.02 in 2013.
Given these factors and the company's continual efforts to improve, I think Pinnacle will be a successful company for many years to come. As said, Pinnacle does have plenty of debt to worry about but as long as its earnings continue to grow the company should not have issues with servicing this debt each year.
