Insider: chiefs gobble up Premier Foods and Domino’s Pizza

One stock has been a star of lockdown, the other has underwhelmed, but bosses of both are piling in.

Premier Foods (LSE:PFD) directors clearly think a 250%-plus surge in share price is no flash in the pan, having backed the Mr Kipling and Sharwood's owner for further progress.

The success-starved stock has rocketed during the lockdown, with the benefits of stockpiling and stay-at-home cooking trends accompanied by progress on resolving the future of its various pension funds.

Last week's purchases by nine managers, including CEO Alex Whitehouse and chairman Colin Day, were made at 65p the day after Premier's annual results, when shares surged 14%.

They closed the week at 67.5p, but with some analysts seeing the potential for Premier to reach 90p or even double in value again. This reflects a virtuous circle where improving cash generation helps to drive down debt and provides the funds for increased growth.

Source: TradingView. Past performance is not a guide to future performance.

Shore Capital analyst Clive Black said the past year had been significant one for the food manufacturer, with a transfer of value from over-indebtedness to equity. 

He added:

“The group has been wandering around in a zombie status for some years, burdened by overall indebtedness. Underneath the balance sheet millstone, however, there has been quite a good company seeking to show its true value for some time.”

CEO Whitehouse has led the group since August, with his promotion from UK managing director revealed on the same day as vastly experienced Day was named as chairman. Both men are former Reckitt Benckiser (LSE:RB.) employees, with Whitehouse working there for 18 years.

The pair have built on Premier's improved trends seen in the past two years. Last week's results extended to 11 the number of consecutive quarters of UK growth, while a major relaunch of Mr Kipling in 2018 has also paid off. Annual sales of Premier's biggest brand have now risen by 17% over the past two years and reached a new record in last week's results.

Trading in the first quarter of the new financial year came in much stronger than City expectations, with sales running 20% higher after households turned to brands such as Bisto, Batchelors and Loyd Grossman during the lockdown. Investors will be hoping that some of these changed eating habits stick now that restrictions are being eased. 

Just as important as the improved trading performance has been a landmark agreement with trustees for the planned merger of three pension funds. This should result in a substantially improved funding situation, which Premier enhanced last week by disclosing that the combined pension surplus was £1.2 billion at the end of March.

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Premier also offered further encouragement on its balance sheet after its net debt to earnings ratio of 2.7x easily beat the company's March 2020 target of three times.

Peel Hunt said:

“We see Premier as on a virtuous circle, where improving cash generation is enabling retirement of expensive debt, which in turn is improving cash generation and providing funds for increased product development, marketing and productivity enhancements.”

The shares are trading on 6.5x price/earnings multiple for the current financial year, but the broker sees the potential for shares to treble by 2023 as debt switches into equity. Its price target rose from 80p to 90p in the wake of last week's results.

Whitehouse spent £65,000 on his first share purchase as CEO, while Day committed £130,000.

CEO wants slice of the action

Last week also saw the new boss of Domino's Pizza (LSE:DOM) buy his first tranche of shares in the delivery company since taking the helm at the start of May. Dominic Paul previously led Costa, where he oversaw the coffee chain's growth between 2016 and the sale by Whitbread (LSE:WTB) to Coca-Cola (NYSE:KO) last year.

He was credited with strengthening Costa's UK market position, as well as developing new segments such as Drive Thru and Costa Express, and accelerating its digital offer.

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Paul joined Domino's Pizza at the height of the Covid-19 lockdown, when most investors assumed that the shutdown would have been positive for the delivery chain.

However, Paul disclosed in a trading update this month that the company had incurred considerable additional costs to offset the benefits from increased sales. Even a positive change in consumer purchasing behaviour as people bought more sides and desserts had consequences in terms of its impact on margins.

Shares fell more than 8% when the company revealed that first half underlying earnings would be slightly down on a year earlier. They had previously raced from 268p at the end of March to 359p two months later, only to fall back to 311.4p in June.

It was near to this level that Paul bought his £200,000 worth of shares. He plans to provide investors with his first impressions of the business alongside interim results in August.