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Take a Bite of Pinnacle Foods

Stocks in this article: PF GIS CAG UN KRFT MDLZ

NEW YORK ( TheStreet) -- It's not often that I discuss relatively unknown small-cap companies, much less those that have operated publicly for less than one year. But I do see a winning formula emerging with Pinnacle Foods (PF), whose stock has been up roughly 20% since the company went public this past April.

I'm not going to pretend that 20% gains in 18 months is something to write home about. But in the packaged food industry, where companies like ConAgra (CAG) and General Mills (GIS) have been ravaged by weak volumes and shrinking margins, I believe Pinnacle's relative performance has been top-shelf. And with Pinnacle's recent deal with Unilever (UN) to acquire salad dressing brand Wish-Bone for $580 million, Pinnacle should now be at the top of every investor's wish list. Not everyone agrees, however.

The deal, expected to finalize some time in 2015, is being dismissed by some analysts as being too expensive. But on what basis? Now, even if we were to get into all of the financial details and dissect the specifics of this deal line-item by line-item, we still won't find an exact apples-to-apples comparison.

Take, for instance, ConAgra, which paid a hefty 28% premium in a deal last year for Ralcorp at $90 per share. And given that this premium equated to roughly 11-times EBITDA, I questioned ConAgra's judgment, especially since the value of this deal was above what the industry average would pay (around 9.5 to 10 times EBITDA at the time). I felt ConAgra overpaid. The Street, meanwhile, felt differently.

While ConAgra hasn't exactly filled investors' appetites for growth, the company has shown modest fundamental improvements since the deal. Synergizing these deals doesn't happen overnight. But investors should nonetheless expect a leaner and more valuable company in the long term. This is assuming that management can continue to remove costs associated with Ralcorp, while also improving asset utilization.

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