What It Will Take For Pinnacle Foods To Climb To The Top Of Its Peer Group?

Deutsche Bank started coverage of Pinnacle Foods Inc (NYSE: PF) with a Buy rating with a $61 price target.

Along with Pinnacle Foods, the brokerage initiated coverage of 12 other U.S.-based food companies with 6 Buy-rated names and 7 holds. Apart from Pinnacle Foods, the brokerage’s top picks are Kraft Heinz Co (NASDAQ: KHC), and Hostess Brands, Inc. (NASDAQ: TWNK).

Analyst Mario Contreras says Pinnacle Foods is following an appropriate strategy for today’s food environment. The company has set relatively modest top-line goals and is focused on a lean operating structure.

“While Pinnacle has a lean operating model, we see opportunity for the company to drive gross margin expansion. The company currently lags its peer group and is targeting 300-400 bps expansion by 2019,” Contreras wrote in a note.

Related Link: Deutsche Bank's Recipe For Food Stock Investing In 2017

Meanwhile, Pinnacle is actively pursuing M&A against underleveraged brands and assets such as Wish-Bone and Boulder.

On the valuation front, the analyst’s $61 target price implies 10 percent premium to the current group multiple of 20x against DB’s C2018 EPS estimate of $2.78, which implies a multiple of 22x. Pinnacle has historically traded at a 12 percent premium to peers.

“We believe the company should continue to trade at this level given gross margin expansion potential, continued ‘premiumization’ of current brands, and continued focus on transformational M&A,” Contreras added.