The Kraft Heinz Company (NASDAQ:KHC) shares are down more than -9.21% this year and recently increased 0.42% or $0.33 to settle at $79.28. Pinnacle Foods Inc. (NYSE:PF), on the other hand, is up 5.16% year to date as of 12/13/2017. It currently trades at $56.21 and has returned -2.16% during the past week.
The Kraft Heinz Company (NASDAQ:KHC) and Pinnacle Foods Inc. (NYSE:PF) are the two most active stocks in the Food – Major Diversified industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect KHC to grow earnings at a 9.87% annual rate over the next 5 years. Comparatively, PF is expected to grow at a 10.89% annual rate. All else equal, PF’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 18.06% for Pinnacle Foods Inc. (PF). KHC’s ROI is 5.30% while PF has a ROI of 6.80%. The interpretation is that PF’s business generates a higher return on investment than KHC’s.
The value of a stock is simply the present value of its future free cash flows. On a percent-of-sales basis, KHC’s free cash flow was -6.99% while PF converted 0% of its revenues into cash flow. This means that, for a given level of sales, PF is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. KHC has a current ratio of 0.80 compared to 1.80 for PF. This means that PF can more easily cover its most immediate liabilities over the next twelve months. KHC’s debt-to-equity ratio is 0.54 versus a D/E of 1.51 for PF. PF is therefore the more solvent of the two companies, and has lower financial risk.
KHC trades at a forward P/E of 20.49, a P/B of 1.64, and a P/S of 3.74, compared to a forward P/E of 20.02, a P/B of 3.38, and a P/S of 2.16 for PF. KHC is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. KHC is currently priced at a -12.19% to its one-year price target of 90.29. Comparatively, PF is -13.03% relative to its price target of 64.63. This suggests that PF is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for KHC and 1.70 for PF, which implies that analysts are more bullish on the outlook for KHC.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. KHC has a short ratio of 4.74 compared to a short interest of 2.02 for PF. This implies that the market is currently less bearish on the outlook for PF.
Pinnacle Foods Inc. (NYSE:PF) beats The Kraft Heinz Company (NASDAQ:KHC) on a total of 10 of the 14 factors compared between the two stocks. PF is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, PF is the cheaper of the two stocks on an earnings and sales basis, PF is more undervalued relative to its price target. Finally, PF has better sentiment signals based on short interest.