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Take a Bite of Pinnacle Foods

Stocks in this article: PF GIS CAG UN KRFT MDLZ

Given that growth in this sector has been virtually non-existent, Wish-Bone, which has annual sales of $190 million, should help "dress up" Pinnacle's long-term revenue growth. What's more, management said it expects this deal will add not only $65 million to Pinnacle's EBITDA by fiscal year 2016, but Pinnacle will also realize $125 million in tax benefits on a net present value.

Essentially, while the growth is not going to happen overnight, it doesn't make a whole lot of sense to evaluate this deal solely on the basis of $580 million, which, by the way, will be financed by cash and debt. And from the standpoint of overall valuation, this deal, which is basically valued at 8.9 times EBITDA, falls in line with the industry average. Not to mention, the deal is cheaper than what ConAgra paid for Ralcorp.

Now, I'm not saying that this is a slam-dunk deal that will propel Pinnacle to higher heights. But when walking down grocery aisles, it's hard to miss the company's strong brands, which are said to be in 85% of American homes. These brands include (among others) Birds Eye, Duncan Hines, Mrs. Paul's and now Wish-Bone, which is -- behind Kraft (KRFT) -- the second leading salad-dressing brand with a 9.1% market share.

Since reaching a 52-week high of $28.52 a share in August, the stock has experienced a pullback by as much as 12%. But with earnings expected to grow by roughly 12% next year, I would be a buyer here on this small correction, which has now priced the stock at a forward P/E of just 15, which is in-line with General Mills and cheaper than Mondelez (MDLZ).

And given the expected value-add of Wish-Bone, Pinnacle's fair value can easily approach $35 in the next 18 months, especially with free cash flow recently growing at a compound annual growth rate of 25% above 2010 levels.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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