A month has gone by since the last earnings report for Pinnacle Foods Inc. PF. Shares have lost about 1.3% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is PF due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Pinnacle Foods Lags on Q4 Earnings, Provides 2018 View
Pinnacle Foods recently came out with fourth quarter and full-year 2017 results, wherein both top and bottom lines missed the Zacks Consensus Estimate. However, sales and earnings improved year over year. Further, the company has provided a promising outlook for 2018.
Q4 Highlights
Adjusted earnings came in at 94 cents per share and include benefits of 5 cents from the 53rd week. The bottom-line figure fell short of the Zacks Consensus Estimate by a penny for the first time after beating the same in the preceding three quarters. Nevertheless, adjusted earnings rose 19% from the year-ago period. Also GAAP earnings came in at $3.71 compared with 74 cents in the prior-year period.
Although net sales of $883.5 million for the quarter missed the consensus mark of $909 million, the same depicted growth of 2.9% from the prior-year period. Top-line results during the period mainly gained from a 7.2% benefit stemming from the 53rd week combined with a 0.6% recovery from the negative impacts of hurricanes that had adversely impacted third-quarter results. Management further stated that the company’s in-market performance continued to remain quite strong in the fourth quarter.
Nevertheless, these upsides were partially offset by negative impacts of 2.4% stemming from the Aunt Jemima (“AJ”) exit, 0.1% from the Boulder SKU rationalization and a decline of 2.4% in underlying sales. We note that underlying sales during the quarter suffered from lower retail inventory levels and lower volume/mix. These were partially countered by 0.8% higher net price realization and impacts of 0.1% stemming from favorable currency translation. Further, inflationary trends leading to higher packaging and logistics costs have also been weighing on the company’s margins.
Moving on, adjusted gross profit for the quarter in review was $274.3 million, advancing 2.5% from the prior-year quarter. Adjusted gross margin, however, slipped 10 basis points (bps) to 31.1% on account of the AJ exit and higher manufacturing investments. Moreover, gross margin also suffered from unfavorable volume mix and higher inflation.
On a GAAP basis, gross profit increased 2.2%, gaining predominantly from improved sales, strong productivity and reductions in performance-based compensation program. These were somewhat offset by higher input cost inflation arising from increased packaging and logistics costs. Further, gross profit also encountered unfavorable impacts of product mix, increased manufacturing investments and discrete costs arising from the AJ exit.
Further, adjusted earnings before interest and taxes (EBIT) went up 11.9% to $204.2 million in the quarter, gaining from growth in gross profit as well as dedicated cost management efforts mainly in discretionary spending.
Segment Results
Frozen: Sales increased 2.7% in the quarter to $381 million on account of benefits arising from the 53rd week as well as recovery from the hurricane related impacts witnessed in the preceding quarter. These were partially offset by unfavorable impacts from the AJ exit and underlying decline in sales. Adjusted EBIT for the segment gained 1% to $89 million.
Grocery: Sales rose 3.8% to $309.6 million backed by the benefits from the 53rd week, partially offset by a decline in underlying net sales. Adjusted EBIT for the segment grew 7.1% to $84.8 million.
Boulder: Pinnacle Foods completed the acquisition of Boulder Brands on Jan 15, 2016. Consequently, it became a wholly-owned subsidiary of the company. In fourth-quarter 2017, sales at the Boulder segment jumped 13.4% to $110.5 million, fueled by robust underlying sales growth and benefits stemming from the 53rd week. These upsides were somewhat mitigated by the SKU rationalization program and shutdown of the Boulder U.K. operations. Adjusted EBIT for the segment totaled $24.5 million, a remarkable surge from the prior-year quarter figure of $12.7 million.
Specialty Foods: Sales tumbled 9.9% to $82.5 million due to negative impacts of the AJ exit and underlying sales decline. Underlying sales were majorly hurt by the lower volume/mix stemming from the company’s previously announced exit from its gardein private label business. These declines were partially countered by improved net price realization and benefits arising from the 53rd week. The segment’s adjusted EBIT came in at $11.3 million, gaining 13.5% from the prior-year quarter.
Full-Year Results
Including a benefit of 5 cents from the 53rd week, adjusted earnings per share for 2017 came in at $2.55, reflecting 18.6% growth from a year ago, mainly benefiting from stringent cost control measures.
Net sales increased 0.5% from the prior year to $3.14 billion, courtesy of underlying net sales growth from favorable volume/mix and net price realization. Top-line performance also gained from the 53rd week and the additional three weeks of Boulder Brands acquisition. These upsides were partially offset by lower retail inventories, the AJ exit and the combined negative impacts of U.K. business closures and Boulder SKU rationalization.
Adjusted gross profit during the year went down 0.9% to $913.2 million, while adjusted gross margin slumped 40 bps to 29%. Further, adjusted EBIT gained 5.7% from the prior-year to $569.3 million.
We also note that during 2017, the company’s market share grew 0.5%, while its composite retail consumption jumped 2.4% from 2016. This also marked Pinnacle Foods’ 15th straight quarter and sixth consecutive year of market share growth mainly fueled by the Duncan Hines and Birds Eye businesses.
Other Financial Aspects
Pinnacle Foods ended the quarter with cash and cash equivalents of $249.8 million, long-term debt of $2,925.6 million and total equity of $2,380.2 million.
During 2017, Pinnacle Foods net cash flow from operating activities was $416 million. The company had incurred capital expenditure of $94.2 million during the year. Management expects to incur capital expenditures of $155-$165 million in 2018.
2018 Guidance
Management remains quite impressed with the company’s overall market share growth as well as stringent cost containing efforts. That said, the company expects adjusted earnings per share for 2018 to be in the range of $2.85-$2.95. Considering the guidance at mid-point, earnings represent growth of 16% from 2017’s 52-week adjusted earnings per share of $2.50. The Zacks Consensus Estimate is pegged at $2.80 for 2018, which is currently below the company’s forecasted range.
The company also expects net sales in the first quarter of 2018 to gain from early Easter, while the same will be offset in the second quarter. Management also expects input cost inflation for 2018 to be in the range of 3.8-4.2%, with greater inflationary pressure in the first half of the year.
Going forward, the company expects results to be stronger and anticipates gross margin improvement of 300-400 bps by 2020. Also, Pinnacle Foods is on track with its savings objectives and network optimization plans. On account of such efforts combined with acquisition synergies, the company expects productivity for 2018 to lie in the range of 4-4.5% of cost of products sold.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to one lower. In the past month, the consensus estimate has shifted by 5.6% due to these changes.
Pinnacle Foods Inc. Price and Consensus
Pinnacle Foods Inc. Price and Consensus | Pinnacle Foods Inc. Quote
VGM Scores
At this time, PF has a subpar Growth Score of D, though it is lagging a bit on the momentum front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our styles scores.
Outlook
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise PF has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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