Pinnacle Foods – What Do Pickles and Pancakes Tell Us About Consumer Staples?

Pinnacle Foods has traded from an IPO price of $20 per share to over $24 in under a week.  What does that tell us?

 

Priced Right

 

The deal was priced “right” – at a discount to the group in terms of EV/EBITDA – that gap has now narrowed, with PF trading at 10.6x EV/EBITDA (our estimate of EBITDA of $450 million).  The packaged food average is 11.4x and the large cap packaged food average is 10.7x.  Based on the company’s growth profile (or lack thereof) we think it should trade closer to the large cap number, but we also recognize that reasoned views of valuation are largely meaningless in staples these days.

 

Scarcity Value

 

Though we mentioned it in our prior note, we apparently underestimated the scarcity value of a relatively high yielding asset in the small–mid cap space.  We have spoken with more than a couple of people that have capital that needs to be deployed and are faced with limited alternatives in the sector.  This probably also serves as at least a partial explanation for MKC’s performance in the wake of, at best, a mediocre quarter and guide.



Yield is a Driver

 

With today’s move above $24 per share, the yield with the proposed dividend is now below 3.00% (2.96%) versus the yield at the IPO price of 3.60%.  For reference, SJM (2.10%), MKC (1.86%), CHD (1.73%), ENR (1.61%) and HRL (1.65%) are the relevant peer group in terms of yield, suggesting further upside to the extent that the performance of PF is related to a paucity of yield in that cap segment of staples.

 

High Debt/EBITDA Has Outperformed

 

Companies with higher debt/EBITDA ratios have outperformed in the staples sector since the beginning of February, and PF is at the higher end of the staples range with a debt/EBITDA ratio of 4.2x.  The market seems to have embraced deleveraging stories (or lower “quality” assets).

 



 

What Have We Learned?

1. Don’t fight money flows
2. Yield still matters
3. Valuation matters, but only when there is a discount (warranted or otherwise) to be exploited
4. Crap is still beating quality

To be honest, we kind of knew all those things, but we appreciate the proof of concept.

 

Call with questions,

 

Rob

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Matt Hedrick

Senior Analyst