Star stock Premier Foods justifies popularity

Up almost 400% since last March, this former laggard is now flavour of the month.

One of the best-performing stocks of the pandemic revealed more “exceptional” progress today as households continue to turn to Premier Foods (LSE:PFD) brands including Bisto and Sharwood's.

The home cooking trends caused by recent lockdowns, and the ongoing closure of pubs and restaurants, have created the perfect environment for Premier. That’s led to further City profit upgrades after the company said sales grew 9% in the quarter to Boxing Day. 

Once trading conditions start to normalise, the pandemic's impact should still be felt, however,  as stronger cash flows have enabled Premier to retire expensive debt and boost investment, including a plan revealed today for selling Mr Kipling cakes in the United States.

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And with more people expected to continue working from home, the longer-term demand outlook for Premier's wide-ranging portfolio remains promising.

Jefferies analyst Martin Deboo said: “Premier is clearly enjoying a good war. However, this is more than just a bubble economy.”

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Today's quarterly sales growth figure was significantly ahead of Deboo's 5.2% estimate, driven by momentum in UK groceries and a better-than-expected result in the branded cakes division. Trading profits are now expected to be between £145 million and £150 million in the year to March, compared with Deboo's initial forecast of £144.8 million.

He added: “Sustained improvement in household penetration, market share and brand investment, which is collectively delivering both growth and debt reduction, is laying the foundations of a better and more conventionally-financed Premier Foods.”

Premier shares recently broke above the 100p level, having languished in a zombie-like state below 50p for the period between 2016 and 2019 due to high levels of indebtedness. The share price rose 165% in 2020 and is currently up 390% since the market low in March.

Underneath that balance sheet millstone, however, analysts believed a strong business was seeking to show its true value. That's been unlocked by chief executive Alex Whitehouse, although he owes some of the recent success to initiatives prior to his appointment in August 2019, such as the rebranding of the Mr Kipling cakes business.

Just as important as the trading improvement has been a landmark agreement with trustees for the merger of three pension funds, resulting in a substantially improved funding situation.

Profit-taking by investors today saw shares fall back 4.4p to 103.6p, even though Whitehouse said the third quarter had been “another period of exceptional growth”.

He added: “Looking to the remainder of the (financial) year, out of home eating is likely to remain heavily restricted and we therefore expect to see continued high levels of consumer demand for our products.”

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Peel Hunt recently named Premier as one of its 31 value stocks for 2021, even though it rose by 165% in the previous year. The broker today increased its price target by 5p to 130p and also upgraded its 2021 profits estimate by 5% to £105 million.

Analyst Charles Hall added: “The renewed lockdown is likely to extend the positive performance in the short-term, but we see potential for some of the themes to be longer lasting, with more people working from home, an increase in cooking from scratch, greater online penetration and a strong base for growing international.”