Unilever (LSE: ULVR) is one of the London market’s most coveted stocks but does Premier Foods (LSE: PFD) have what it takes to replicate the company’s success and once again become appealing to investors?
Undervalued?
At the time of writing, shares in Unilever trade at a forward P/E of 19.4 while Premier Foods trades at only 5.6 times forward earnings. These metrics say a lot about the fortunes of these two companies.
On one hand, you have an emerging markets star, owner of some of the most valuable consumer brands in the world, with sales growing at a steady 4% or more per annum. On the other hand, you have Premier Foods, a company that has struggled to get sales off the ground in recent years, is grappling with a mountain of debt and has only reported a profit once in the past five years.
Premier’s problems stem from the company’s pre-crisis debt-funded acquisition binge. At its peak, Premier’s debt stood at £1.8bn, six times earnings before interest, tax, depreciation and amortisation — a ratio of more than two times EBITDA is usually considered high.
Over the past few years, Premier has been trying to reduce debt but nearly £200m of derivative costs, pension problems, and flagging sales have hampered turnaround efforts. Sales have contracted around 19% per annum since 2011, compared to Unilever’s average revenue growth rate of 3.8% per annum since 2012. Unilever’s net debt-to-EBITDA is less than one today while Premier’s is still an elevated 3.5 times EBITDA.
Haunting debt
With such a hefty pile of debt still haunting the company, it’s clear that Premier will struggle to grow for some time to come.
At the end of the first half, the company’s net debt stood at £556m, £29m lower year-on-year. At this rate, it will take more than a decade for Premier to get its debt back under control and that’s without accounting for pension issues. The company’s pension deficit amounted to £229m at the end of the first half.
Still, for the company’s fiscal first half, sales rose by 2% reflecting the consolidation of acquisition Knighton Foods.
Foolish summary
Overall, City analysts are expecting revenue growth of around 5% for the year ending 31 March 2017 and a pre-tax profit of £68m has been pencilled-in, the company’s first pre-tax profit for two years (and the second in six). A pre-tax profit of £72m is expected for the year after and if the company meets this lofty target, then there’s hope for the group.
Nonetheless, considering the company’s past troubles, debt and pension issues, I’m not convinced that Premier is even a speculative bet. The shares may be trading at a highly attractive valuation but it looks as if they’re cheap for a reason and that debt pile means there’s no hope of a dividend for many years.
All in all, Premier isn’t the next Unilever. Unilever is still the best investment for long-term defensive investors.
