Gamble of the day: A punt on top food brands

If you've been trawling the stockmarket for cheap shares in recent years, the chances are you will have stumbled across this food makerby now. The maker of top food brands, such asMr Kipling cakes, Bisto gravy and Loyd Grossman sauces, has traded on a very low price-to-earnings (p/e) multiple for a long time. This has led many writers, including me, to suggest the shares are worth a punt. Yet so far they've proved a bad investment and volatile at that. So far, ithas proved the point that shares are often cheap for a reason.

The firm has two main issues. Firstly, it has been loaded up with too much debt. Secondly, its business has lacked focus and has had the misfortune of dealing with some tough supermarket customers. Successive management teams have tried to woo investors with the promise of repaying debt and getting the business back on an even keel, but they have yet to deliver.

But at the risk of looking foolish, I think that there may be some light at the end of the tunnel. This last year has seen the management take some tough but vital decisions. New shares have been issued to raise money, which has allowed the debt pile to be cut and put the pension fund where there is still a big shortfall on a more sustainable footing.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

More importantly, Premier Foods (LSE: PFD) now looks like a more focused business. It is cutting costs and ploughing the savings into promoting its key brands. It has also hived off the troublesome Hovis bread business into a separate firm. And it is organising its business to cope with the changes in food retail, so that its products can still make good profits in convenience stores, online, and through discount supermarkets such as Aldi.

Yet the outlook for Premier Foods is probably the best it has been for ages. Debt and interest payments look like they can start coming down in a meaningful way too, while the company will not have to pay any tax for a good few years.

The shares are on a p/e of under five, but don't be swayed by that. On my preferred measure of earnings before interest and tax/enterprise value (EBIT/EV) including the pension fund deficit in EV they yield 10.7% on current profits, which looks reasonable.

Verdict: risky buy at 40p