RBC Capital Upgrades ConAgra (CAG) to Outperform; Sees Possible Pinnacle Foods (PF) Acquisition
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RBC Capital upgraded ConAgra (NYSE: CAG) from Sector Perform to Outperform with a price target of $54.00 (from $50.00) to reflect new pure-play focus, margin opportunity, and potential M&A upside.
Analyst David Palmer commented, "We think the stock warrants a narrower EV/EBITDA valuation discount vs its current 2x discount to peers, due to 1) its new pure-play focus 2) gross margin upside potential from revenue management, and 3) M&A optionality supported by its needed scale and deferred tax asset. We also tweak our FY17 and FY18 EPSe higher from $2.41 and $2.59 to $2.45 (+18% YOY; cons. $2.46) and $2.63 (+7% YOY; cons. $2.65) based on recent margin momentum, partially offset by disynergies from the Lamb Weston spin. While ConAgra recently reported a $0.15 fiscal Q1 EPS beat, our new estimate reflects 1) a $0.05 offset due to favorable expense timing and 2) $0.06 of EPS dilution due to stranded cost absorption post-spin. Our new target of $54 reflects a blended FY17 EV/EBITDA of 13x, assuming 13.5x for new Conagra, 11x for Lamb Weston, and $2/share for JV stakes."
Palmer said a potential large-scale acquisition, such as Pinnacle Foods (NYSE: PF), supports our $62 upside scenario. "In our view, Conagra's lack of shareholder protection, pure-play aspirations, and a projected low level of leverage post-spin all point to a major acquisition near term," he said. "We believe Pinnacle may be the most likely candidate because 1) its board has demonstrated a willingness to sell, 2) ConAgra has an intimate knowledge of its business given past history between management, and 3) we believe Conagra and Pinnacle synergies would be among the highest in US Food. Our initial merger model – on pp 7 – points to a 16% EPS accretion assuming a 50/50 stock/cash deal and a $62 takeout price for Pinnacle."
Shares of ConAgra closed at $46.92 yesterday.
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