The Zacks Analyst Blog Highlights: Hillshire Brands, Pinnacle Foods, Hormel Foods, Unilever and J. C. Penney

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May 14, 2014, 09:30 ET

CHICAGO, May 14, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Hillshire Brands Company (NYSE:HSH-Free Report), Pinnacle Foods Inc. (NYSE:PF-Free Report), Hormel Foods Corp. (NYSE:HRL-Free Report), Unilever plc (NYSE:UL-Free Report) andJ. C. Penney Company, Inc. (NYSE:JCP-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday's Analyst Blog:

Hillshire's Pinnacle Buy – Notes on the $6.6B Deal

Packaged meat producer, The Hillshire Brands Company (NYSE:HSH-Free Report) announced on Monday that it has agreed to buy branded foods company Pinnacle Foods Inc. (NYSE:PF-Free Report) in a cash and stock deal valued at approximately $6.6 billion, including debt. Following the announcement, Pinnacle Foods' share price rose 13.2%, while Hillshire's shares fell 3.2%.

Per the deal, Pinnacle Foods shareholders will get $18.00 in cash and 0.50 shares of Hillshire Brands common stock for each share. The deal values Pinnacle Foods at $36.02 a share, representing an implied premium of 18% of Pinnacle's closing price on May 9. Once the deal closes, Pinnacle Foods shareholders will own around 33% of the combined company.

The deal will expand Hillshire Brands' product offering and bolster its presence across the frozen, refrigerated and dry grocery categories.

Both the companies have complementary businesses. The deal will add Pinnacle Foods' brands like Birds Eye frozen vegetables, Wish-Bone salad dressing, Vlasic pickles, Duncan Hines cake mixes and Log Cabin syrups to Hillshire Brand' meat dominated brand portfolio comprising Hillshire Farm lunch meats Jimmy Dean sausages and Ball Park hot dogs. "Meats go with vegetables, sandwiches go with pickles," Sean Connolly, CEO of Hillshire, told analysts on Monday validating the deal.

In a similar deal, another branded food and meat producer Hormel Foods Corp. (NYSE:HRL-Free Report) bought Unilever plc's (NYSE:UL-Free Report) Skippy peanut butter business in Jan 2013 to reduce its dependency on meat.

The combined company's enhanced scale, reach and capabilities will result in significant cost synergies, thereby accelerating margins. The deal will be immediately accretive to earnings and is expected to deliver $140 million in cost synergies by the third year through supply chain savings and lower overhead costs. Moreover, according to management the deal will result in "input cost diversification" — offset rising prices of meat and pork as the dependency on meat products goes down. Costs of meat and beef have risen sharply in the last one year.

The deal has been approved by the board of directors of both the companies. Moreover, private equity group, Blackstone — Pinnacle Foods' largest shareholder owing 51% of the company — has agreed to vote in favor of the transaction. The post-merger company will be run by present CEO Connolly. The deal, subject to shareholder and regulatory approvals, is expected to close in September this year.

Hillshire Brands plans to fund the transaction with $2.1 billion of equity and by raising $4.8 billion of debt. The company expects to maintain its annual dividend of 70 cents a share but will suspend its share repurchase program to focus on debt pay-down.

While Hillshire Brands carries a Zacks Rank #3 (Hold), Pinnacle Foods has a Zacks Rank #2 (Buy).

Is JC Penney (JCP) Expected to Miss Earnings?

J. C. Penney Company, Inc. (NYSE:JCP-Free Report), a department store retailer, is slated to report its first-quarter fiscal 2014 results on May 15, 2014. In the last quarter, it posted a positive surprise of 13.9%. Let's see how things are shaping up for this announcement.

Factors Influencing the Quarter

J. C. Penney's endeavors to recoup and give itself a major facelift seem to be paying off well as it posted narrower-than-expected loss for the fourth quarter of fiscal 2013. We believe that although the company has brought back promotions, and is focusing on improving assortments, a better marketing strategy and the JCP Rewards program, all these will take time to bring the company back on the growth trajectory. Moreover, the soft economic recovery and erratic consumer behavior may also act as hurdles.

Earnings Whispers?

Our proven model does not conclusively show that J. C. Penney is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here, as you will see below.

Zacks ESP: ESP for J. C. Penney is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at a loss of $1.26 per share.

Zacks Rank: J. C. Penney has a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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