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

Deutsche Bank started coverage of Pinnacle Foods Inc 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 KHC, and Hostess Brands, Inc. 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.