Will Pinnacle Make Tyson Regret Buying Hillshire Instead Of It?

Aug.11.14 | About: Pinnacle Foods (PF)

Summary

Heading into earnings, Mr. Market has high expectations for Pinnacle Foods in terms of both revenue and earnings growth.

If management can show strong growth like what's expected, it will send a message that the company isn't the no-growth name its been for years.

The prospect of growth, combined with a valuation that is far cheaper than Hillshire's, should leave investors in Tyson wondering if the company should have bought it instead of Hillshire.

On Aug. 13, Pinnacle Foods (NYSE:PF) will report revenue and earnings for the second quarter of its 2014 fiscal year. After the company terminated its agreement with Hillshire Brands (NYSE:HSH) when the latter decided to be acquired by Tyson Foods (NYSE:TSN) for over $7.7 billion ($63 per share), shares fell 6.5% to where they sit at now. However, after the company reports profits for the upcoming quarter, will Tyson have an even greater sense of satisfaction that it made the right decision, or will the company begin regretting not going after Pinnacle instead?

Analysts have high expectations for Pinnacle

For the quarter, Pinnacle is expected to report revenue of $629.92 million. If management can come through on this forecast, it will represent an 11% jump compared to the $569.04 million the company reported the same quarter last year. While it's possible that the food supplier can deliver on this estimate, it would be surprising in the sense that it would be the first significant sales increase seen by the company in years. To put this in perspective, over the past four years, sales have stayed relatively unchanged, inching up just 1% from $2.44 billion to $2.46 billion.

Earnings Preview
Last Year's Forecasted
Revenue (millions) $569.04 $629.92
Earnings per Share $0.29 $0.33
Click to enlarge

From a profit standpoint, hope are even higher. For the quarter, Pinnacle is expected to report earnings per share of $0.33. Although this seems small for a business whose shares are trading at $30.76, it would be nearly 14% higher than the $0.29 reported in last year's quarter. This improvement would likely be due, for the most part, to Pinnacle's rising sales forecast but would also be attributable, to some extent, to margin expansion, most likely coming from its cost of goods sold, which declined from 75.3% of sales in 2010 to 73.4% by the end of the company's 213 fiscal year.

Will this make Tyson jealous?

If Pinnacle does achieve these admittedly high goal posts, it will be a sign that business is, once again, starting to pick up. In its first quarter of this year, the company managed to do quite well, beating forecasts by $0.01 and showing year-over-year sales growth of 5% from $613 million to $644 million. In the event that it can not only hit this quarter's forecasts but also meet expectations for the year, the company's stock will be trading at 17.7 times forward earnings and 20.9 times forward earnings assuming that Hillshire would have followed through with the acquisition of the company.

Price Comparison of Hillshire and Pinnacle
Hillshire Pinnacle
Forward P/E 36.3 17.7
Forward P/E at Buyout Price 36.4 20.9
Buyout Price $7.7 billion $4.3 billion
Per-Share Buyout Price $63.00 $36.41
Click to enlarge

At first glance, these prices are anything but cheap, but they are far lower than what Tyson has agreed to buy Hillshire for. According to Hillshire's press release revealing that it would be acquired, the company's shareholders will receive $63 per share in cash. This places a value on Hillshire of $7.7 billion but if you add to that the company's debt load, Tyson will be paying $8.55 billion for the company. Excluding debt, this means that Tyson will be paying 36.4 times forward earnings for Hillshire.

Takeaway

Heading into earnings, Pinnacle doesn't look cheap, but when you consider that the company is expected to grow at a pretty nice clip year-over-year, it might make for an interesting prospect. This is especially true when you consider that Hillshire, the company's now-former suitor, is being bought up at around two times that price. While this doesn't mean that Pinnacle is a strong buy, it does, on the other hand, imply that Tyson might have been better off making an offer for the company instead of going with Hillshire. For prospective investors, this grants not only a catalyst-driven opportunity, but also a relative value-oriented one.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.