From these comments, we can pretty easily back into an estimate for synergized 2012 EPS for the combined company:
Revenue:                            $1.75 billion          (2 years of ~5% growth from 2010 combined level of $1.58 billion)
Operating Profit:                  $158 million        (9% operating margin)
Interest expense:                -$12 million        (This represents annualized 3Q11 interest expense)
Pretax income:                    $146 million
Taxes:                                  -$51 million        (Assumes a 35% tax rate; YTD in 2011, effective tax rate was 40%)
Net income:                           $95 million
Shares outstanding:               69 million         (In 3Q11, there were 68.8 million diluted shares outstanding)
EPS:                                  $1.38

Reason #2 why LNCE is unlikely to make $2 a share anytime soon: Management has a track record of overpromising and underdelivering, so even $1.40 is probably too high.
Ok, so even though management’s guidance implies less than $1.40 per share in earnings, the company could always exceed this guidance, right?  Maybe management was sandbagging?  That may be possible, but I think it’s unlikely.  The current CEO of LNCE, David Singer, became the CEO of Lance Foods in mid-2005 and has remained as the CEO of the combined company after the merger.  Each year during its release of 4^th quarter numbers, the company issues initial adjusted EPS guidance for the upcoming year.  Under Singer’s stewardship, LNCE has never once exceeded the high end of initial guidance and has missed the low end in 4 out of 6 years: 

                                                       2006       2007      2008      2009      2010     2011
Low end of guidance:                     $0.65     $0.80     $0.70     $1.00     $1.41     $0.85
High end of guidance:                    $0.70     $0.88     $0.80     $1.15     $1.53     $1.00
Actual Adjusted EPS:                      $0.65     $0.76     $0.60     $1.13     $1.09      TBA

We don’t have the final number yet for 2011 adjusted EPS (LNCE will report 4Q11 results on February 10^th) but the company has already indicated that they will come in below the low end of initial guidance.  In July, LNCE lowered the guidance range for 2011 adjusted EPS to $0.75 - $0.90, then in November, the company announced that adjusted EPS is “expected to be at the lower end of our previously announced range of $0.75 to $0.90.”

Given this track record, I think the odds are that LNCE’s EPS, even after the merger integration is complete, comes in below $1.40.  It wouldn’t be the first time a management team has oversold the case for merger synergies.

Instead of looking at adjusted EPS, we could also look at operating margins.  Recall that, in describing the potential merger synergies, LNCE’s CEO expected fully-realized synergies to deliver “2.5% to 3.0% improvement in operating margins compared to 2010 pro forma levels of approximately 6.0%.”  Year-to-date in 2011, LNCE has reported adjusted operating income of $59 million on revenue of $1223 million for a margin of 4.8%.  And keep in mind that this $59 million figure for adjusted operating income includes $18 million of add-backs for “special items” and doesn’t include $6 million of “other expenses” that the Company deems to be non-operating.  The Company has a ways to go to get to the 8.5%-9.0% range.

If you prefer to look at EBITDA instead of operating profit, LNCE has generated adjusted EBITDA (ie, giving credit for management’s add-backs for merger and integration expenses) of $101 million year-to-date for a margin of 8.3%.  As an aside, I generally agree with the Buffett view that EBITDA is a flawed metric (“does the tooth fairy pay for capital expenditures?”).   For some acquisitive food companies however, amortization of intangibles gets to be a large enough item that one could argue that operating profit understates the cash profitability of the business.  As part of the merger, LNCE did write up a significant amount of intangible assets on its balance sheet, so amortization expense has increased post-merger, but amortization of intangibles still isn’t a huge part of D&A.  For the 9 months ended 9/30/11, amortization of intangibles was $2.9 million, and total D&A was $42 million.  In LNCE’s case, I think operating profit is a good metric for evaluating the Company, because D&A has been a good proxy for average capex.  Year-to-date in 2011, D&A has been $42 million and net capex (“purchases of fixed assets” net of “proceeds from sale of fixed assets”) has been $41 million.  For the five years from 2006-2010, LNCE’s average annual D&A was $33 million and its average annual net capex was $36 million.

Lance Foods                             Snyder’s
1992:     12.5%
1993:     10.2%
1994:     8.7%
1995:     3.9%
1996:     7.7%
1997:     9.3%
1998:     8.4%
1999:     7.8%
2000:     6.4%
2001:     6.9%
2002:     6.6%
2003:     6.8%
2004:     6.4%
2005:     4.5%
2006:     4.4%
2007:     5.2%                         FYE 3/30/08:       6.1%
2008:     3.5%                         FYE 3/29/09:       6.0%
2009:     6.4%                         FYE 3/28/10:       7.8%
2010:     6.3%

If LNCE is unlikely to achieve $1.40 in synergized EPS (let alone $2), then it trades at pricy multiples.
For 2011, the first full year as a combined Company, LNCE is likely to generate around $0.75 in adjusted EPS, between $90-$100 million in adjusted EBIT, and between $145-$155 million in adjusted EBITDA.  Based on these figures and the recent $22.57 stock price and $1.8 billion enterprise value, LNCE trades at 30x EPS, 18-20x EBIT, and around 11.5-12.5x EBITDA.  Based on these multiples, it’s clear the market is pricing in some significant improvements in profitability. 

Let’s say the Company does achieve the high end of management guidance for synergies and in the next year or two gets to $1.40 in EPS, $160 million in EBIT, and $220 million in EBITDA.  Even at these levels, LNCE at its current price would trade at 16x EPS, 11x EBIT, and 8x EBITDA.  While these are more reasonable levels, I wouldn’t call them obviously cheap.   And more importantly, for all the reasons listed above, I think these profitability levels are very unlikely to be achieved anytime soon.

Lance Foods                    Snyder’s
1992:     $58 million
1993:     $48
1994:     $43
1995:     $19
1996:     $37
1997:     $45
1998:     $41
1999:     $41
2000:     $37
2001:     $40
2002:     $36
2003:     $38
2004:     $38
2005:     $30
2006:     $32
2007:     $39                    FYE 3/30/08:       $36
2008:     $30                    FYE 3/29/09:       $40
2009:     $59                    FYE 3/28/10:       $53
2010:     $62

Note also that Lance Foods made $54 million of acquisitions in 1999, $44 million in 2004, $55 million in 2008, and $24 million in 2009, so what little growth there has been is at least partly due to acquisitions rather than just organic growth.   Snyder’s looks a bit more promising, but its operating profit was boosted somewhat by $58 million of acquisitions made in FY 2008.  Snyder’s fiscal  year ended 3/28/10 does look pretty good (as does Lance Foods’ 2009), but I’d point out that 2009 was actually a very good year to be in the snacks business, as the benefits of dramatic declines in ingredient costs more than offset any volume declines from the weak economy.

My point here is that neither Lance Foods nor Snyder’s demonstrated remarkable growth prospects as stand-alone companies, so I don’t think the combined company is worthy of premium valuation multiples.

The biggest risk to shorting LNCE is that the Company could get bought out…
As Mario Gabelli notes, LNCE could be an acquisition target, particularly for Kraft Foods after it completes the spinoff of its global snacks business (targeted to be officially spun off by the end of 2012).  According to Kraft, their snack business will be “focused largely on capitalizing on global consumer snacking trends, building its strength in fast-growing developing markets and in instant consumption channels.”  Like LNCE, Kraft’s snacks business uses a direct-store-delivery model, so there is some logic in combining the two companies.  Although LNCE wouldn’t help Kraft much in its ambition to expand in foreign markets, LNCE would help Kraft expand in U.S. “instant consumption channels” such as convenience stores.  Although I’m of the opinion that LNCE’s attractiveness as an acquisition target might be overrated (especially since LNCE doesn’t have remarkable growth prospects), we certainly can’t rule out the possibility here, especially since food companies tend to be acquisitive. 

If LNCE is acquired at some point, what is the downside to a short position?  Most transactions in the snack food space involve the purchase of private companies, so rarely are profitability figures for the target disclosed.  The best comp I can think of is Diamond Foods’ 2010 purchase of Kettle Foods for 11.6x EBITDA.  Diamond was rumored to have outbid several other players (including Frito-Lay and Lance, among others) so I don’t think Diamond got a bargain price here.  Suppose LNCE is successful in achieving synergized EBITDA of $220 million (this would be the EBITDA level commensurate with 9% EBIT margins and $1.75 billion in revenue), and the Company is bought for 11.6x.  This would mean a total purchase price of about $2.55 billion.  If we subtract out ~$270 million of net debt and divide by 69 million shares, then the implied share price is about $33, or about a 45% premium to the current price.  So yes, there is potential downside to shorting LNCE.