Recently, Jack Hough of Barron’s featured Pinnacle Foods Inc (NYSE:PF), thinking that the company could rise in the near future. The company was listed on the market three months ago by Blackstone at around $20 per share. Interestingly, T. Rowe Price Small Cap owned around 774,500 shares in the company, accounting for 0.66% of the total outstanding shares. Citadel Advisors, with more than 2.9 million shares, has a 2.48% stake in the company. Should investors buy Pinnacle Foods Inc (NYSE:PF) now? Let’s find out.
Many brands are market leaders in the U.S. food industry
Many U.S. consumers should be very familiar with Pinnacle Foods Inc (NYSE:PF)’ brands as its products could be found in more than 85% of the total U.S. households. It holds the number one position in many of its brands, such as Birds Eye (27.2% market share), Lender’s (45.7%), Vlasic (31.3%), and Comstock and Wilderness (36%). The company operates in three main business segments: Birds Eye Frozen, Duncan Hines Grocery, and Specialty Foods. Most of its operating income, $178 million, or 62.7% of the 2012 operating profit, was generated from the Bird Eye Frozen segment, while Duncan Hines Grocery produced $120.75 million in profits.
But highly leveraged
What worries me is its highly leveraged position. As of March 2013, Pinnacle had $915 million in equity, $132 million in cash, and as much as $2.6 billion in long-term debt. Moreover, Pinnacle Foods Inc (NYSE:PF) has a high amount of goodwill and intangible assets of more than $3 billion. Thus, its tangible book value was negative at around $2.1 billion. Its debt level is much higher than its peers, including General Mills, Inc. (NYSE:GIS) and Mondelez International Inc (NASDAQ:MDLZ). Its net debt/EBITDA is as high as 4, while the net debt/EBITDA ratios of General Mills, Inc. (NYSE:GIS) and Mondelez International Inc (NASDAQ:MDLZ) were lower, at only 2.1 and 2.25, respectively.
Mondelez – the focus on emerging markets
While Pinnacle Foods Inc (NYSE:PF)’ main playground is the U.S., Mondelez focuses its business in emerging markets, especially in China, India, and Brazil. In the first quarter of 2013, Mondelez International Inc (NASDAQ:MDLZ) experienced double-digit growth in all of those three countries. Interestingly, it is the global leader in several food categories including Biscuits, Chocolate, Candy, and Powdered Beverages while its Gum and Coffee categories ranked second globally.
Looking forward, Mondelez is expected to deliver top line grow in the range of 5% to 7% due to the near-term difficulties, including capacity limitation and low coffee price in some markets. The operating EPS for the full year was estimated to fluctuate around $1.55 to $1.60 per share.
General Mills – a favorite of income investors
General Mills, Inc. (NYSE:GIS) also generated a lot of its business in the U.S. The U.S. Retail segment was the highest revenue contributor and also the highest operating profit contributor. In 2012, General Mills generated nearly $10.5 billion in revenue and as much as $2.3 billion in operating profit. Recently, the company raised its full year fiscal 2013 outlook for EPS to a range of $2.66 to $2.68 per share. What investors might like about General Mills is its uninterrupted dividends since 1944. General Mills has consistently raised its dividends from $0.55 per share to $1.22 per share in the past ten years.