Why Hillshire Brands (HSH) Stock Is Spiking Before the Bell

NEW YORK (TheStreet) -- Hillshire Brands (HSH) stock is gaining in pre-market trading after Pilgrim's Pride Corporation (PPC) proposed an acquisition for $45 per share in an all-cash transaction valued at $6.4 billion. 

The proposal represents a 25% premium to Hillshire shares over the previous 10 trading days. Pilgrim's noted the proposed transaction would likely close in the third quarter of 2014 and would void Hillshire's merger agreement with Pinnacle Foods (PF). A combined company would have combined revenue of $12.4 billion and EBITDA of $1.4 billion. 

Before market open, shares were spiking 21.1% to $44.82. 

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TheStreet Ratings team rates HILLSHIRE BRANDS CO as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HILLSHIRE BRANDS CO (HSH) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • HSH's revenue growth has slightly outpaced the industry average of 3.2%. Since the same quarter one year prior, revenues slightly increased by 3.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Food Products industry and the overall market, HILLSHIRE BRANDS CO's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • HILLSHIRE BRANDS CO reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, HILLSHIRE BRANDS CO turned its bottom line around by earning $1.49 versus -$0.12 in the prior year. This year, the market expects an improvement in earnings ($1.73 versus $1.49).
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Food Products industry. The net income has significantly decreased by 54.8% when compared to the same quarter one year ago, falling from $93.00 million to $42.00 million.
  • Currently the debt-to-equity ratio of 1.57 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Along with the unfavorable debt-to-equity ratio, HSH maintains a poor quick ratio of 0.81, which illustrates the inability to avoid short-term cash problems.
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