Pinnacle Foods Inc. (NYSE:PF) shares are down more than -0.77% this year and recently decreased -0.14% or -$0.08 to settle at $59.01. Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF), on the other hand, is up 1.31% year to date as of 01/10/2018. It currently trades at $33.22 and has returned 1.90% during the past week.
Pinnacle Foods Inc. (NYSE:PF) and Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF) are the two most active stocks in the Food – Major Diversified industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect PF to grow earnings at a 11.92% annual rate over the next 5 years. Comparatively, BUFF is expected to grow at a 15.85% annual rate. All else equal, BUFF’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 22.74% for Blue Buffalo Pet Products, Inc. (BUFF). PF’s ROI is 6.80% while BUFF has a ROI of 27.30%. The interpretation is that BUFF’s business generates a higher return on investment than PF’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. PF’s free cash flow (“FCF”) per share for the trailing twelve months was +0.03. Comparatively, BUFF’s free cash flow per share was +0.10. On a percent-of-sales basis, PF’s free cash flow was 0.11% while BUFF converted 1.7% of its revenues into cash flow. This means that, for a given level of sales, BUFF 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. PF has a current ratio of 1.80 compared to 4.20 for BUFF. This means that BUFF can more easily cover its most immediate liabilities over the next twelve months. PF’s debt-to-equity ratio is 1.51 versus a D/E of 1.62 for BUFF. BUFF is therefore the more solvent of the two companies, and has lower financial risk.
PF trades at a forward P/E of 21.11, a P/B of 3.55, and a P/S of 2.24, compared to a forward P/E of 30.84, a P/B of 26.79, and a P/S of 5.18 for BUFF. PF is the cheaper of the two stocks on an earnings, book value and sales basis. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. PF is currently priced at a -9.4% to its one-year price target of 65.13. Comparatively, BUFF is 0.15% relative to its price target of 33.17. 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 1.70 for PF and 2.20 for BUFF, which implies that analysts are more bullish on the outlook for BUFF.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.PF has a short ratio of 2.13 compared to a short interest of 10.48 for BUFF. This implies that the market is currently less bearish on the outlook for PF.
Blue Buffalo Pet Products, Inc. (NASDAQ:BUFF) beats Pinnacle Foods Inc. (NYSE:PF) on a total of 7 of the 14 factors compared between the two stocks. BUFF has lower financial risk, 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, book value and sales basis, Finally, HAIN has better sentiment signals based on short interest.