Buyouts Aid Pinnacle Foods' Growth, Specialty Unit A Worry

Pinnacle Foods Inc (NYSE:PF) has been steadily expanding its portfolio through acquisitions and innovations. Also, the company has been gaining from its operational efficiency initiatives that have been boosting savings. However, underlying weaknesses in the Specialty segment and changing consumer preferences have been denting the company’s top line.

Let’s delve deeper into these factors and see if Pinnacle Foods’ growth drivers can help offset the hurdles.

Portfolio Expansion & Savings Aid Growth

Acquisitions have been an important growth driver for this Zacks Rank #3 (Hold) company. Along with portfolio expansion, acquisitions have been driving Pinnacle Foods’ distribution network, customer base and long-term growth. We note that the Boulder Brands buyout in 2016, provided the company new prospects in refrigerated foods business. The benefits from this acquisition are expected to enhance procurement, manufacturing and logistics operations. Further, the company expects to achieve synergies worth more than $15 million in 2017 and projects incremental synergies of $4-6 million in 2018 from Boulder Brands.

Other acquisitions which have driven Pinnacle Foods’ business in the past include Duncan Hines, Garden Protein and Wish-Bone. Further, the company plans to expand its brands line-up through innovations. In this regard, the company launched Hungry-Man handfuls during the third quarter of 2017, which is a four-line item of hand-held pocket meals. Other noteworthy launches include the introductions of Perfect Size for One, Vlasic purely pickles and Birds Eye product lines.

Moving ahead, Pinnacle Foods remains on track with operational excellence program, aimed at generating productivity savings in supply chain. Owing to such efforts, the company expects gross margin to improve 300-400 basis points by 2019. Pinnacle Foods is also pursuing other initiatives to boost profits including low-margin SKU rationalization and increasing the effectiveness of trade promotional spending.

Courtesy of dedicated business expansions and efficiency boosting initiatives, Pinnacle Foods has been witnessing year-over-year growth in earnings since 2014. This also helped the company’s shares gain 13.4% in the past year, as against the industry’s decline of 2.3%.

Headwinds Impacting Performance

Pinnacle Foods’ Specialty segment has been reporting sluggish performance since the past five quarters. The segment’s performance was hurt by the exit of low-margin Aunt Jemima frozen breakfast products and lower net price realization in the third quarter. Also, the exit of the gardein private label business and soft food service sales hampered underlying sales, alongside weighing upon the segment margin.

On account of these obstacles, along with consumer’s shift toward healthy and natural food products, the company’s sales have lagged the Zacks Consensus Estimates in five out of the trailing seven quarters.

Final Thoughts

Nevertheless, management expects earnings to improve 19% in 2017, on the back of steady growth in market share stemming from well- performing brands. Further, management remains committed toward network optimization and operational excellence programs and continues to expect benefits from acquisitions. We expect such upsides to offset the weakness in the Specialty segment and sustain growth.

Do Consumer Staples Stocks Grab Your Attention? Check These

Investors interested in the same sector may consider stocks such as Estee Lauder Companies Inc (NYSE:EL) , Conagra Brands Inc (NYSE:CAG) and Meredith Corporation (NYSE:MDP) . While Estee Lauder sports a Zacks rank #1 (Strong Buy), Conagra Brands and Meredith Corporation carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Estee Lauder came up with an average positive earnings surprise of 18% in the trailing four quarters. It has a long-term earnings growth rate of 12.5%.

Conagra Brands pulled off an average positive earnings surprise of 7% in the trailing four quarters. Also, it has a long-term earnings growth rate of 7%.

Meredith Corporation delivered an average positive earnings surprise of 7.1% in the trailing four quarters. It has a long-term earnings growth rate of 8%.

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