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.
All three food companies offer good yields
At the current trading price, General Mills offers its shareholders quite a decent dividend yield of 3%. The dividend yield of Mondelez is much lower, at only 1.7%. Pinnacle Foods has just announced its quarterly dividend of around $0.18 per share. Thus, the dividend seems to be quite good too, at 2.80%. Pinnacle Foods is the cheapest valued food company. The market values the company at 10.72 times EV/EBITDA. Among the three, Mondelez has the highest EV multiple at more than 14, while the EV multiple of General Mills is in between at 11.36.
My Foolish take
With a leading position in the U.S. food market, a good dividend yield, and the lowest EV multiple, Pinnacle Foods seems to be a good stock for long-term income investors. If Pinnacle Foods Inc (NYSE:PF) could reduce its debt level, it could be much more flexible with its financial position. Moreover, it could substantially reduce its debt expense, which has been around $190 million in the past twelve months. Consequently, the bottom line will grow, bringing more return for shareholders.
The article An Enticing Food Company for Your Portfolio originally appeared on Fool.com and is written by Anh HOANG.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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