The issues with PF are well known – crappy categories and sluggish top line sitting atop a highly-levered balance sheet. As we mentioned previously, the company does have some margin levers to pull in ’13, which may be helped over time by lower commodity costs. All of these factors came together in what was a pretty solid first quarter out of the IPO gate.
What we liked:
- EPS of $0.34, ahead of somewhat unreliable consensus estimate
- A substantial improvement in gross margins (+290 bps) against an easy comparison – this is where we see the most opportunity for progress for the company in 2013, as per our prior piece on the name
- Excellent FCF quarter ($49.5 million or $0.42 per share versus $20.3 million in the year ago)
- Next quarter’s comparisons remain unchallenging, so we could likely see a repeat of the margin performance posted in Q1
- New dividend (as of last night) - $0.72 annually
What we didn’t like:
- Lackluster sales growth in Birds Eye Frozen (+0.7%) and Duncan Hines (2.3%) even with volumes flattered by the timing of Easter
- Inventories increased 2.6%, outpacing sales growth
Bottom line, with the newly instituted dividend, downside in the name is probably limited to $22/$23 per share (where the yield with the annual $0.72 dividend creeps above 3%). Further, with another quarter of easy margins comparisons, there is likely some further upside in the shares despite what we see as full valuation.
Call with questions,
Rob
Robert Campagnino
Managing Director
HEDGEYE RISK MANAGEMENT, LLC
Matt Hedrick
Senior Analyst