Shares of Pinnacle Foods (PF, Financial), a provider of branded foods, have been rising and have appreciated by 17% in the last year. The retailer reported its third quarter results very recently, which came in ahead of the Street's expectations. This resulted in a sharp increase in its share price.
The case of a good quarter
Driven by higher demand for its products, revenue rose 9% to $624 million, over last year. The top line was higher than the analysts' estimate of $620 million. Key reasons for this growth were higher volumes as well the acquisition of Wish Bone business in October last year. Wish Bone acquisition added 8% in sales and volumes added 2.5%.
Going by the segments, sales in the Duncan Hines Grocery segment increased 21%, the largest and the highest growing segment of all. This growth was also due to the addition of Wish Bone, resulting in the revenue of $271 million. Even the Specialty Food segment surged 5.7% to $95.4 million, over last year, mainly because of an increase of 4.8% in volumes. However, the Birds Eye Frozen segment remained flat at $257 million, as compared to the prior year.
The bottom line delighted the investors as it jumped significantly due to the benefit of the termination fee given by Hillshire brands. Hillshire Brands announced that it will not be able to buy Pinnacle Foods since it is being acquired by another company. Hillshire Brands is now acquired by Tyson Foods. This one-time benefit from Hillshire boosted the bottom line of the company. But, this is not a regular affair. On an adjusted basis, earnings surged to $0.41 per share from $0.36 per share in the last year. This was in line with the estimates. Also, the company managed to register an improvement in the gross margins, which stood at 27.4%. The expansion of margins was due to better productivity and a favorable product mix during the quarter.
The road ahead
For Pinnacle Foods, acquisition is one of the greatest strategies to grow its business. After acquiring Wish Bone salad dressings last year, it acquired Garden Protein recently. Garden Protein is a Canada-based company and is bought for a total of $155 million. Its Garden brand is the fastest growing brand since it provides plant based protein, which is an alternative to animal-based formats, such as fish and meat. Pinnacle Foods plans to expand this segment through increased marketing. This segment has already become very popular among customers since they are highly health conscious.
However, increased marketing and discounts during the most awaited holiday season will affect the bottom line. Therefore, the company changed its earnings outlook to a range of $1.71 per share to $1.74 per share from an earlier outlook of $1.70 per share to $1.75 per share.
Key thoughts
Although the food retailer tightened its earnings outlook, it expects to outperform in sales. The company is expected to increase revenue through its new business as well as higher demand for its existing business. Moreover, its promotions during the holiday season should help in attracting more customers. Thus, Pinnacle Foods should have a promising fourth quarter and is worth investing.
