For Immediate Release
Chicago, IL – October 08, 2013 – Zacks Equity Research highlights Pinnacle Foods ( PF- Free Report) as the Bull of the Day and ConAgra Foods ( CAG- Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on the Exxon Mobil Corp. ( XOM- Free Report), Chesapeake Energy Corp. ( CHK- Free Report) and Carrizo Oil & Gas Inc. ( CRZO- Free Report).
Here is a synopsis of all five stocks:
Bull of the Day:
Pinnacle Foods ( PF- Free Report), Zacks Rank #1 (Strong Buy), manufactures, markets, and distributes branded food products. Its brands are well known by consumers and include the Birds Eye, Duncan Hines, and Mrs. Paul’s product lines. It recently acquired Wish Bone, adding to the mix of strong brand names. The company says that its products are found in 85% of American homes and are category leaders, holding a number one or number two market share position in ten of twelve category offerings.
Analysts are optimistic about the earnings outlook for Pinnacle. Over the last 60 days, earnings estimates have been revised up six times. The Zacks 2013 and 2014 Consensus Earnings per Share Estimates have increased $.02 to $1.55 and $.07 to $1.73 respectively. Earnings per share are expected to expand 11.6% in 2014.
Pinnacle Foods is priced at 15.4 times 12 month forward earnings and at a discount to its peer group which is trading at 16.1 times 12 month forward earnings. Likewise, its PEG ratio is 1.16 compared to 1.92 for the peer group. The market is paying only a slight premium for earnings growth.
Pinnacle has a dividend yield of 2.75% which is competitive to the 10 year treasury yield. The company is targeting a payout ratio of 50% which leaves cushion for future increases.
The company has also strongly grown free cash flow in recent years. Free cash flow has risen from $88 mln in 2009 to $173 mln last year and posted a 25% compounded annual growth rate over the three year period. The strength of free cash flow should be supportive to the dividend and future growth opportunities.
Looking under the hood, the company has a net operating loss which can be applied to future profits to reduce cash taxes. 75% of the loss is expected to be utilized through 2015.
Pinnacle has reduced its leverage ratio (net debt dividend by earnings before interest, taxes, depreciation, and amortization) from 7.7x in 2008 to 4.2x in June of 2013. The company was recently able to refinance some debt and is touting an annual interest savings of $100 mln in the wake of recent capital structure changes.
Bear of the Day:
ConAgra Foods ( CAG- Free Report), Zacks Rank #5 (Strong Sell), is a banded and value added food company. Its product lines include Hunts, Chef Boyardee, Orville Redenbacher’s and Swiss Miss. Although it has a well-known product line, the company has disappointed investors with results. ConAgra posted a 7.5% negative earnings surprise after releasing profits on September 19. It posted earnings of $0.37/share against a Zacks Consensus Estimate of $0.40/share. It has recorded a negative surprise two out of the past three quarters.
In its most recent earnings release, the company noted that food volumes were below plan due to category and customer challenges. Although ConAgra is working to address disappointing execution via merchandising and promotion, analysts were quick to cut profit estimates.
The Zacks Consensus Earnings per Share Estimates for fiscal year 2014 and fiscal year 2015 have each been reduced 10 times over the past 30 days. 2014 EPS projections were cut $0.10 to $2.32, while 2015 EPS were dropped $0.12 in the past 30 days.
The price and EPS Consensus chart shows earnings estimates rolling over and the adverse impact on price.
ConAgra is priced at 12.6 times forward earnings per share against a 10 year median of 14.4 and 15.4 for its peer group. Likewise, its PEG ratio is 1.21 compared to a 10 year median of 1.68 and 2.06 for its peer group. Investors seem uneasy about the company’s ability to improve profit growth and seem to be taking a “show me” view with discounted valuation.
Free cash flow has been positive at ConAgra, but choppy in recent years. Free cash flow was $1.078 bln in fiscal year 2010, but has been lower each of the past three fiscal years and stood at $972 mln in fiscal year 2013.
The plus for the company may rest in its dividend yield of 3.29% and a projected payout ratio of 48% for fiscal year 2014. The dividend yield is competitive relative to the 10 year treasury yield and the payout ratio should support the dividend.
Massive Injection Pressures Natural Gas
Natural gas spot prices tumbled to below $3.50 per million Btu (MMBtu) on Thursday, Oct 3, following the U.S. Energy Department's weekly inventory release that showed a larger-than-expected rise in the commodity’s supplies. On a further bearish note, the storage build was also higher than the benchmark 5-year average gain for the week.
Mild weather forecasts – which could slow demand even more – further worsened the situation. However, natural gas ended slightly higher Friday (at $3.51 per MMBtu), as investors closely tracked the development of a tropical storm activity in the Gulf of Mexico that could disrupt production from the energy-rich region.
About the Weekly Natural Gas Storage Report
The Weekly Natural Gas Storage Report – brought out by the Energy Information Administration ( EIA) every Thursday since 2002 – includes updates on natural gas market prices, the latest storage level estimates, recent weather data and other market activities or events.
The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.
Analysis of the Data
Stockpiles held in underground storage in the lower 48 states rose by 101 billion cubic feet (Bcf) for the week ended Sep 27, 2013, higher than the guided range (of 93–97 Bcf gain) as per the analysts surveyed by Platts. The increase – the twenty-fifth injection of 2013 – also exceeded both last year’s build of 77 Bcf and the 5-year (2008–2012) average addition of 82 Bcf for the reported week.
Following past week’s build, the current storage level – at 3.487 trillion cubic feet (Tcf) – is now 49 Bcf (1.4%) above the 5-year average. However, supplies are still down 155 Bcf (4.3%) from the last year’s level.
Natural gas stocks hit an all-time high of 3.929 Tcf in 2012, as production from dense rock formations (shale) – through novel techniques of horizontal drilling and hydraulic fracturing – remained robust. In fact, the oversupply of natural gas pushed down prices to a 10-year low of $1.82 per million Btu (MMBtu) during late Apr 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).
However, things started to look up in 2013. This year, cold winter weather across most parts of the country boosted natural gas demand for space heating by residential/commercial consumers. This, coupled with flat production volumes, meant that the inventory overhang was gone, thereby driving commodity prices to around $4.40 per MMBtu in Apr – the highest in 21 months.
However, with moderate weather expected during the next few weeks, leading to reduced power demand, natural gas price may experience another downward curve. This, in turn, is expected to pull down natural gas producers, particularly small ones.
Considering the turbulent market dynamics of the natural gas industry, we advocate big, relatively low-risk names like Exxon Mobil Corp. ( XOM- Free Report) and Chesapeake Energy Corp. ( CHK- Free Report) – both Zacks Rank #3 (Hold) stocks.
However, one company that stands out is Carrizo Oil & Gas Inc. ( CRZO- Free Report). This Zacks Rank #2 (Buy), small, inexpensive natural gas producer has seen its share price almost double since the start of 2013. Despite this price appreciation, we remain optimistic on the firm’s near-term prospects, supported by its exposure to the high-return shale plays, as well as the company’s above-average production growth.
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