Gamble of the day: A punt on top food brands

Shares are often cheap for good reasons, says Phil Oakley. But that may no longer be the case at this top food brands maker.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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.

727-PFD

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.

Advertisement
Advertisement - Article continues below

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

Advertisement

Recommended

Visit/investments/stocks-and-shares/share-tips/600641/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Visit/519913/share-tips-8-stocks-for-robust-returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Visit/519724/share-tips-of-the-week-166
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Visit/519436/share-tips-of-the-week-165
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/stockmarkets/601101/has-the-stockmarket-hit-rock-bottom-yet
Stockmarkets

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/investments/commodities/energy/oil/601107/oil-shoots-higher-have-we-seen-the-bottom-for-the-big-oil
Oil

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020