Stock Watch
American Italian Pasta: Boiling Over
As the low-carb diet craze cools, this pasta purveyor has returned to profitability. But does it have enough bulk to sustain the recent run-up in its share price?
January 27, 2005
Talk about an Atkins backlash.
On Wednesday, American Italian Pasta (PLB) reported a return to profitability after two straight quarters of red ink. The share price spiked 21% on the news, making the stock one of the market's biggest movers for the day.
The company attributes its improving results to a cooling of the low-carbohydrate diet craze that trimmed waistlines as well as the share prices of bread, cereal and pasta purveyors.
But despite the stock's increased popularity, and the improving outlook for carb-loaded companies, American Italian Pasta doesn't look like a healthy choice for your portfolio, says Mitchell Pinheiro, an analyst with Janney Montgomery Scott, a Philadelphia-based investment firm.
Pinheiro reiterated his "sell" rating after the pasta maker's announcement. He thinks the stock is terribly overvalued. It recently traded at $25, giving it a P/E ratio of 31 times consensus earnings estimates for fiscal 2005 (ending in September). That's mighty steep for a company that reported a 75% drop in earnings over the same quarter a year ago and saw operating margins cut in half. Pinheiro thinks American Italian Pasta is worth only $17.
The pasta maker's sales seem to be slowing their free-fall, but they're still dropping -- by 2.4% last quarter. Yet the company is aiming to raise prices this year -- a risky move right now, says Pinheiro. With sales already deflated, a price increase could drive revenues even lower if executed poorly.
On average, analysts expect American Italian Pasta's profits to grow only 5% annually over the next few years, versus 8% for the food retailing industry and 11% for the S&P 500, according to Thomson First Call.
--Erin Burt
