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BMO Capital Increases Pinnacle Foods’ Price Target to $56

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Price movement

Pinnacle Foods (PF) has a market cap of $5.6 billion. It rose by 1.0% to close at $48.28 per share on July 13, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 2.9%, 11.3%, and 15.1%, respectively, on the same day. PF is trading 7.2% above its 20-day moving average, 11.0% above its 50-day moving average, and 12.8% above its 200-day moving average.

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Related ETFs and peers

The PowerShares DWA Consumer Staples Momentum Portfolio ETF (PSL) invests 3.2% of its holdings in Pinnacle Foods. The ETF tracks an index of US consumer cyclical companies selected and weighted by price momentum. The YTD price movement of PSL was 3.7% on July 13.

The iShares Dow Jones US ETF (IYY) invests 0.02% of its holdings in Pinnacle Foods. The ETF tracks a broad, cap-weighted index of US companies covering 95% of the US market.

The market caps of Pinnacle Foods’ competitors are as follows:

  • Mondelēz International (MDLZ): $71.6 billion
  • General Mills (GIS): $43.0 billion
  • ConAgra Foods (CAG): $21.1 billion

Pinnacle Foods’ rating

BMO Capital has increased Pinnacle Foods’ price target to $56 from $50 per share. TheStreet reported that “the price increase comes as Pinnacle Foods continues to be the firm’s ‘top pick’ for 2016 due to ‘visibility toward our higher-than-consensus 2017 EPS[1. earnings per share] estimate driven by Bouldersynergies; 2) the sustainability and potential acceleration of its growth algorithm led by superior execution (sales growth, ongoing productivity); and 3) PF’s all-time-high discount to its US peers (10%).”

On July 12, 2016, Goldman Sachs upgraded Pinnacle Foods’ rating to “buy” from “neutral” and set the stock price target at $57 per share. TheStreet Ratings rated the stock as a “buy” with a “B” score.

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Performance of Pinnacle Foods in fiscal 1Q16

Pinnacle Foods reported fiscal 1Q16 net sales of $754.3 million, a rise of 13.4% over the net sales of $665.3 million in fiscal 1Q15. Its net income and EPS fell to $24.8 million and $0.21, respectively, in fiscal 1Q16, compared with $41.5 million and $0.35 in fiscal 1Q15. It reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $105.2 million in fiscal 1Q16, a fall of 3.8% from fiscal 1Q15.

Between 4Q15 and 1Q16, Pinnacle Foods’ cash and cash equivalents fell by 54.9% and its inventories rose by 10.2%. In 1Q16, its current ratio fell to 1.9x and its debt-to-equity ratio rose to 2.6x, compared with 2.1x and 2.0x, respectively, in fiscal 4Q15.

Projections

The company has reaffirmed its projections for fiscal 2016:

  • adjusted EPS in the range of $2.08 to $2.13, including ~$0.05 from the Boulder Brands acquisition
  • input cost inflation in the range of 2% to 3%
  • interest expenses of ~$140 million
  • effective tax rate of slightly above 36.6%
  • capital expenditure in the range of $135 million to $145 million, including ~$30 million for the Gardein capacity expansion

In the next part of this series, we’ll discuss The J.M. Smucker Company.

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