Goldman Sachs Upgrades Pinnacle Foods to a ‘Buy’

Pinnacle Foods (PF) has a market cap of $5.6 billion. It rose by 1.3% to close at $47.79 per share on July 12, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 3.4%, 8.7%, and 13.9%, respectively, on the same day. PF is trading 6.6% above its 20-day moving average, 10.2% above its 50-day moving average, and 11.7% above its 200-day moving average.

The PowerShares DWA Consumer Staples Momentum Portfolio (PSL) invests 3.2% of its holdings in Pinnacle Foods. The ETF tracks an index of US consumer cyclical firms selected and weighted by price momentum. The YTD price movement of PSL was 3.6% on July 12.

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:

• Mondelez International (MDLZ): $71.8 billion
• General Mills (GIS): $42.7 billion
• ConAgra Foods (CAG): $20.9 billion

Goldman Sachs has upgraded Pinnacle Foods’ rating to a “buy” from “neutral” and also set the stock price target at $57.0 per share. TheStreet Ratings rated the stock as a “buy” with a score of B.

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 (earnings per share) 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.

The company has reaffirmed its projections for fiscal 2016:

• adjusted EPS in the range of $2.08 to $2.13, which includes ~$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, which includes ~$30 million for the Gardein capacity expansion

In the next part of this series, we’ll discuss Archer Daniels Midland.