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Pinnacle Foods Grows on Acquisitions Despite Industry Woes


Shares of Pinnacle Foods, Inc PF have been underperforming of late, owing to underlying weaknesses in its Specialty segment and pickle business. The company’s share performance has remained dismal since it released second-quarter 2017 results on Jul 27, wherein sales were negatively impacted by the divestitures of its low-margin businesses.

Further, shares of the company have also declined 3.5% in the past three months, compared with the industry’s fall of 1.5%.

Investors seem to be disappointed with the company’s murky sales surprise history, whereby it missed estimates in 10 out of the past 14 quarters. Being a leading marketer and distributor of canned meat, shelf-stable pickles and frozen seafood, Pinnacle Foods has been struggling with consumers shift toward healthy and natural food products. Stiff competition, aggressive promotional spending and tight margins have also been bothering firms in the food industry.

Considering its ongoing challenges, Pinnacle Foods now expects earnings for 2017 to be at the lower end of its expected range of $2.55-$2.60 per share. The Zacks Consensus Estimate for the forthcoming third-quarter 2017 results as well as for 2017 has also declined by a penny to reach 58 cents and $2.55 respectively, in the past 60 days.

Nevertheless, this Zacks Rank #3 (Hold) company remains hopeful on improving its performance backed by dedicated expansion initiatives. Let’s now delve into some of the efforts undertaken by the company to improve performance and the factors from which it has been gaining.

Acquisitions Aiding Portfolio Expansion

The acquisition of Boulder Brands, completed in January 2016, gave Pinnacle Foods a new growth platform for refrigerated foods and also added brands such as Udi's, Glutino, Smart Balance, Earth Balance and EVOL to the company’s portfolio. The benefits from the acquisition are expected to be spread over 2017, in areas such as procurement, manufacturing and logistics. The company received synergies of $15 million from the acquisition of Boulder Brand in 2016. It expects to achieve the same worth $15 million in 2017.

The company has been carrying out various acquisitions over the years to expand its distribution network and customer base and boost long-term growth. Few noteworthy acquisitions of the company in the past include Duncan Hines, Garden Protein and Wish-Bone salad dressings.

Initiatives to Enhance Savings & Margins

The company has an operational excellence program in place designed to generate annual productivity savings across the supply chain. In fiscal 2016, the company’s operational excellence initiative drove productivity savings of 4%, as compared with 4.4% in fiscal 2015 and 3.7% in fiscal 2014.

These productivity savings, along with higher pricing, have been mitigating the impact of input cost inflation to drive gross margins. The company continues to expect gross margin to improve 300 to 400 basis points by 2019.

In order to enhance gross margin, Pinnacle Foods is also pursuing other initiatives, including the improvement of its product mix through innovation. The company has also been exiting from low-margin businesses in order to utilize resources more efficiently.

In this respect, the company had undertaken divestiture of Aunt Jemima frozen breakfast products in May 2017, and also closed down its Boulder UK operations in November 2016. Such rationalizing efforts have negatively impacted the company’s top line of late, in the long run. These initiatives are expected to aid Pinnacle Foods to focus specifically on growth oriented businesses.

Do Consumer Staples Stocks Grab Your Attention? Check These

Investors may also consider stocks such as Estée Lauder Companies Inc. EL flaunting a Zacks Rank #1 (Strong Buy) while Constellation Brands, Inc. STZ and The Procter & Gamble Company PG each carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1stocks here.

Estée Lauder delivered an average positive earnings surprise of 13.7% in the trailing four quarters. It has a long-term earnings growth rate of 12%.

Constellation Brands pulled off an average positive earnings surprise of 11.7% in the trailing four quarters. It has a long-term earnings growth rate of 18.2%.

Procter & Gamble came up with an average positive earnings surprise of 3.1% in the trailing four quarters. It has a long-term earnings growth rate of 9.3%.

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