I am taking a look at Pinnacle Foods (PF) from an investor's standpoint. I am interested in the food industry. Is this company a good long-term investment?
Here we have a small company that just had its IPO this year. I am going to compare other companies in the same industry and see if this is a good investment.
Is the recent acquisition of Wishbone significant?
The company recently agreed to purchase "Wishbone Salad Dressing" business from Unilever PLC (UL) for $575 million in cash. The company will have a loan of $525 million become due by 2020 and the rest will be paid in cash.
This is significant for a small company like Pinnacle Foods. The acquisition, which will consolidate into its Duncan Hines grocery division, holds the number three overall position for salad dressing.
Wishbone and the already-purchased Western brand dressings will bring a total of $190 million in annual sales into the company's grocery division. The company's revenue in 2012 totaled $2.47 billion and the acquisition will add about 7.6% to the company as a whole and a whopping 21.3% to the Duncan Hines Grocery division.
The transition is expected to be finalized by 2015. Bringing this type of growth to one of its divisions with a top notch brand is very significant to me as a long-term value investor.
This move by Pinnacle Foods may be good, but there are competitors out there. How does the company stand up to some of its competition?
Which Company is the best Value Investment?
I am looking at Pinnacle Foods and two of its competitors side-by-side. Pinnacle Foods and General Mills (GIS) are pretty close to each other in terms of what they pay out. Both companies' P/E ratios are also fairly close which also reflect returns that investors are expecting on earnings.
Looking at the PEG ratio, I have learned that the general rule of thumb is that this ratio should be under 1.00. Hands down, Pinnacle Foods would definitely be my choice.
Just as a low PEG ratio provides a better value, so does a lower Price/Sales ratio. A ratio under 1.00 is preferred but none of these companies have that. Both Pinnacle Foods and TreeHouse Foods (THS) are much lower than General Mills.
If I am just observing these three stocks side-by-side to calculate which one I would choose, I would have to go with Pinnacle Foods. Not only does it offer a dividend comparable to General Mills, its value ratios seem to look the best overall.
Cost Structures to Consider
When I observe the cost structure of all three companies, it looks like General Mills does the best job when it comes to thriftiness and production.
The company seems to be far ahead of Pinnacle Foods and TreeHouse Foods in manufacturing products for less money. In fact, being a larger company and having such a good "cost of revenue" protection record means more can go to gross and net profits.
While General Mills has done such a great job with its revenue production costs, Pinnacle Foods stands out above the other two with its administrative and sales costs.
The company appears to be able to manage with about 18% more efficiency than the other two.
I would be comfortable choosing Pinnacle Foods for a long-term investment. The company appears to look like a good value investment, and its recent acquisition of Wishbone from Unilever will play a significant role in its growth. It does a good job managing its administrative and sales costs compared to the other two companies and it has a decent dividend.
Author's Note: The charts above took information from Yahoo Finance. Information on Wishbone acquisition and its financial significance to the company may be found in its quarterly report on its website.