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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (242)  | Author's Website |

Premier Foods Gets a Write-Up in Barron's

The British small cap trades cheaply based on estimated earnings per share and free cash flow

January 13, 2020 | About:

British small-cap company Premier Foods (LSE:PFD) got a nice write up this weekend in Barron’s. The stock trades cheaply based on estimated earnings per share and free cash flow. It’s brands are not well known here in the U.S., but are very popular in the U.K.

The stock trades for 38.3 pence (50 cents), there are 847 million shares and the market cap is 324 million pounds ($421.05 million). Earnings per share were a loss of 2.5 pence and the stock does not pay a dividend. It’s difficult to measure the value on price-earnings ratio and dividend yield.

Top-line growth has been respectable. Sales grew from 771 million pounds in 2016 to 833 million pounds over the last 12 months. The fiscal year ends in March. Net income went from a 29 million pounds to a loss of 20 million pounds. Free cash flow has been awesome and has been positive for the several years. It was 40 million pounds over the last 12 months and 65.5 million pounds in 2016.

The balance sheet is a little debt heavy, but the free cash flow helps. This is common with food companies as their sales can be predictable. Cash is 28 million pounds and receivables are 66 million pounds. The liability side shows 149 million pounds in payables and 498 million pounds in debt.

Some of Premier’s better known brands include: Ambrosia, Bachelor’s, Ooh! Bistro, Mr. Kipling and OXO. The company manufactures seasonings, cooking sauces, quick meals and snacks.

What got me turned onto Premier is an article in this weekend’s Barron’s. Premier’s stock traded for over $72 15 year ago. The stock only trades at 4.3 times next year's expected earnings. The company has reported nine consecutive quarters of sales growth and has been paying down debt.

The company got itself in trouble back in 2006 with a 2 billion pounds acquisition of Hovis bread maker RHM. The acquisition was in large part funded with debt. Management thinks that free cash flow will be 50 million pounds at the end of this year. If so, that’s a free cash flow yield of around 15.4%.

I went to Tesco’s (TSCDY) website to try to find some of Premier’s brand. Page after page of Mr. Kipling’s cakes popped up. OXO’s bouillon cubes came up. Paxo has all types of stuffings. When looking at food, I always check Aldi’s. Aldi’s is very aggressive and has done a good job growing across Europe and the U.S. I couldn’t find any of Premier’s items. They could be there, but I couldn’t locate any. Plenty of items could be found on Amazon (NASDAQ:AMZN).

I couldn’t find any interesting institutional money managers, other than big index funds.

I like Premier’s stock. I can see why Barron’s wrote about it. The stock is cheap, the brands are well known and management seems like it knows what it’s doing. I don’t think we’ll buy it as it’s a very small company and extremely thinly located.

This is the type of research you’re going to have to do when the big, American companies run out of steam. You’ll have to look for international and these types of small caps. They’re out there, you just have to turn over a lot of rocks to find a deal. The stock is probably sellng at a discount with Brexit and the fact that it got itself into trouble with too much debt.

Disclosure: We do not own shares.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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