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Pinnacle Foods Rallies on Buyouts & Strong Market Position

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Pinnacle Foods Inc. has been riding on sustained market share growth. This renowned food manufacturer and distributor boasts a sturdy brand portfolio, buoyed by acquisitions and innovation. Indeed, these factors have been raising investors’ optimism, evident from the stock’s 14% rally in the past three months, against the industry’s decline of 8.3% in the same time frame. On the flip side, the company struggles with input cost inflation and a sluggish Specialty segment. That said, let’s take a closer look at the factors impacting this Zacks Rank #3 (Hold) company.

Strong Market Share & Other Strategic Moves

Pinnacle Foods has long been gaining from in-market advancements. In fact, during first-quarter 2018, the company’s retail consumption expanded 3.5% along with market share growth of 0.4 points. This marked the company’s 16th consecutive period of growth in composite market share. The sturdy performance reflects the company’s solid customer reach, whose products can be found in more than 85% U.S. households. Further, innovations have contributed toward building a sturdy portfolio. Noteworthy innovations in the past, include new varieties of the Duncan Hines Decadent, Duncan Hines Perfect Size baking kits, Birds Eye product lines and Vlasic purely pickles. For 2018, management plans to roll out products under the Birds Eye brand and will also be expanding the Hungry-Man Handful line, Duncan Hines line, gardein and Evol brands.

In addition, Pinnacle Foods brand augmenting efforts include undertaking acquisitions that improve distribution network and expand customer base. The buyout of Boulder Brands, completed in January 2016, provided Pinnacle Foods a growth platform for refrigerated foods and added several products, complementary foodservice, private label and Canadian businesses. In 2017, the company gained synergies of $16 million from the Boulder acquisition. Further, management expects to benefit from the residual synergies associated with this acquisition. In December 2017, the company acquired Beaver Dam food facility to expand Birds Eye line. Other than this, Pinnacle Foods acquired the Duncan Hines manufacturing business and Garden Protein in 2014 and also purchased the Wish-Bone salad dressings business in 2013.

Along with endeavors to constantly expand brand portfolio, Pinnacle Foods focuses on strengthening marketing capabilities. In this respect, the company recently announced its partnership with VaynerMedia.

Further, the company has an operational excellence program in place, which is designed to generate annual productivity savings in the supply chain. On account of such efforts combined with acquisition synergies and benefits from the network optimization, the company expects productivity for 2018 in the range of 4-4.5% of cost of products sold. Productivity in the second half of 2018 is expected to be higher.


Lingering Concerns

Pinnacle Foods has been battling increased costs, primarily stemming from logistics for quite some time. During first-quarter 2018, the company’s adjusted gross margin contracted 130 basis points (bps) on account of increased inflation from transportation costs as well as costs related to innovation outsourcing. Further, management expects input cost inflation for 2018 in the range of 3.8-4.2%.

Apart from this, a sluggish Specialty segment also weighs on Pinnacle Foods’ performance. The company has been witnessing weaknesses in this unit since six consecutive quarters. In the first quarter, sales in the segment tumbled 15% to $75.2 million due to negative impacts of the AJ exit and lower volume/mix.

Final Thoughts

Despite the aforementioned headwinds, Pinnacle Foods undoubtedly has several reasons to rejoice, courtesy of well-chalked strategic efforts to maintain a strong market position. Well, these factors have also encouraged management to provide an impressive earnings view for 2018.

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