AdvancePierre Foods: The Leader In Value-Added Sandwiches

Morgan Stanley started coverage of AdvancePierre Foods Holdings Inc APFH with an Overweight rating and $28 price target, saying the company's leadership position in value-added sandwiches should support 3 percent mid-term volume growth.

AdvancePierre holds a dominant leadership position in the value-added sandwich category, a pocket of secular growth within US Food that has grown 3-4 percent on average in recent years.

"APFH's leadership position in value-added sandwiches should support both a healthy volume growth (~3%) and EBITDA margin (~18%) profile, with upside potential from productivity and M&A," analyst Matthew Grainger wrote in a note.

Related Link: Credit Suisse Initiates AdvancePierre Food At Outperform, Positive On Expansion Outlook

Grainger believes the company can sustain healthy 3 percent plus volume growth, driven by its leadership position in the category, diversified distribution base and targeted innovation opportunities (e.g., handheld breakfast).

Further, the company's strong cash flow should pave way for accretive M&A's and cash returns.

"We see APFH as the natural consolidator in its categories, which — with a pipeline of 65+ acquisition candidates — should offer ample bolt-on opportunities," Grainger highlighted.

Even under more conservative assumptions, the analyst sees a hypothetical $100 million acquisition generating about 6 percent EPS accretion.

On the valuation front, the stock is trading at 10.3x2017e EV/EBITDA and Grainger said it doesn't fully reflect the company's compelling growth algorithm for 2-3 percent volume and 8-10 percent EPS growth. This leaves the stock poised for further upside as the market gains confidence in both sustainability of margins and the viability of its attractive growth outlook.