Pinnacle Foods has had an eventful six months. Kicking off the year with the launch of an IPO, the US food group went on to report impressive first-quarter earnings. While first-half earnings dipped somewhat last week, the firm’s deal to buy Unilever‘s Wish-Bone business could signal a positive year ahead for the frozen food to baking mix maker.
Pinnacle has something of a diverse and varied product portfolio. The deal to acquire the number-one Italian dressings brand in the US, Wish-Bone, from Unilever will be a welcome addition to the stable. It will sit amongst a raft of centre-store products that range from frozen fish and vegetables to condiments, waffles and bagels.
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In particular, analysts see the acquisition as a good strategic fit with Pinnacle’s Vlasic pickle and Open Pit BBQ sauce businesses. Stephens analyst Farha Aslam believes it should also pair well with its Birds Eye vegetable line as a marinade.
Janney analyst Jonathan Feeney concurs that the acquisition is strategically sound. “This business fits CEO Bob Gamgort and his team perfectly on three fronts: One, it is widely known but under-marketed; two, it participates in a large US$2bn category, and a healthy one like Birdseye; three, it has been part of a much larger portfolio where there is some evidence it has been neglected.”
The group upped its full-year earnings forecast last week on the back of its Wish-Bone acquisition. The company now expects EPS of $1.53 to $1.57, compared to previous guidance of $1.49 to $1.55.
However, while analysts have welcomed the US$580m acquisition of the brand from Unilever, Pinnacle nevertheless faces a number of challenges this year.
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By GlobalDataPrivate equity firm Blackstone Group, which previously held 100% and now owns around 71% of Pinnacle, set out its plans to launch an initial public offering for the firm in January. Shares are now trading 25% up on the IPO offering price of $20.
The float, however, pushed earnings down substantially in the first half as a result of related charges. The figures also prompted Stephens analyst Farha Aslam to highlight areas Pinnacle may face challenges in going forward.
The firm’s Birds Eye frozen business is facing pressure from private label and smaller players, which, Aslam says, are being aggressive on pricing.
“That said, Pinnacle is selectively managing price points within the category to garner profitable volume,” she added.
Another area of heightened competitor activity is in the firm’s Duncan Hines grocery division, particularly in frostings. Alsam, however, points to innovation and “incremental consumer programmes” as key to ensuring a “successful baking season” for the firm.
It is volume growth and the intense promotional environment, however, that analyst believe will be the “chief risk” for Pinnacle if it wants to achieve the earnings growth targets it has set itself.
Over the last few years, Pinnacle has been working hard at consolidating its footprint through the closure of a number of manufacturing facilities. Now this is complete, the company is expected to turn its focus on improving efficiencies in its operations – by improving systems, logistics and technologies – as the plant consolidation benefits slowly wind down over the next year.
This may provide a much-needed boost to the firm’s bottom line, which slid somewhat in its first-half. Net losses widened to $7.04m from a net loss of $1.02m in the prior year for the six months to the end of June.
Analysts, however, remain optimistic of the firm’s ability to meet its guidance, as well as its ability to make further acquisitions if necessary.
Stifel analyst Chris Growe regards the group’s estimates as “achievable”, with a numer of tailwinds providing a welcome lift.
He adds: “Private label continues to hold or lose market share across most categories and volumes are on the upswing against the prior year. While we regard volume growth as the chief risk for this business and its food peers in the future, the risk in 2013 is more heavily focused on increased promotional spending.”
Growe explains that promotional spending across the food industry picked up in 2012 into 2013, but said there has since been “a slight sequential decline” and the overall increase in promotional spending in the categories it tracks is up less than 1%.
“We regard this as a very tolerable increase as most food companies remain “surgical” in their promotional programmes. We continue to see this as a threat spreading to other categories, but, for now, this is a limited threat to Pinnacle.”
Volume growth opportunities may also be limited by Pinnacle’s limited global presence. While many of its large cap food peers have international and emerging market divisions capable of enhancing the overall growth of the business, Growe points out that Pinnacle’s business is confined to the US and Canada.
“Volume growth opportunities are therefore limited by slower growing populations.”
Aslam suggests Pinnacle’s M&A appetite is “still strong”, adding that the company is “still in the M&A market”. She says: “Debt, equity and Blackstone backing provide funding options to make additional purchases.”
Growe suggests Pinnacle’s “strong free cash flow generation” provides the company with sufficient flexibility to pursue small acquisition opportunities while paying down debt.
Pinnacle says it has the capacity to continue pursuing M&A despite just buying Wish-Bone. Speaking on the firm’s second-quarter earnings call this week, CEO Bob Gamgort suggested the integration period for the Wish-Bone business would not deter the company from looking at other potential acquisitions.
If, however, Pinnacle decides against making acquisitions, it could look to pay down debt instead and strengthen its balance sheet further. Either way, the company will have its hands full until the end of the year integrating the Wish-Bone business.
