Despite still battling away in a difficult marketplace, I reckon Premier Foods’ (LSE: PFD) recent strategy shift towards cutting costs and away from boosting sales could lead back to chunky earnings growth.
The Mr Kipling manufacturer saw underlying sales slip 1.4% during the year ending March 2017 to £790.4m, while adjusted pre-tax profits dived 11.8% to £74.2m.
As a result, chief executive Gavin Darby announced a chance in approach, commenting that “with the industry changing rapidly, we have updated our strategy to give an equal focus to revenue growth, cost efficiencies and cash generation.” Premier Foods is now striving to deliver £20m worth of cost savings in the next two years.
Cheap but tasty
These measures are an essential step in addressing the inflationary environment that is causing input prices to soar. Premier Foods cited soaring values of commodities such as sugar, chocolate, wheat, palm oil and dairy products in denting profits during the past year.
And with grocers cutting promotional activity in favour of offering lower everyday prices, denting Premier Foods’ volumes, the company is aiming to reassert control in a bid to get earnings chugging higher again
Of course the business has a lot of hard yards in front of it as it battles a tough operating environment and seeks to get its efficiency programme off the ground. But with Premier Foods dealing on a forward P/E ratio of just 5.1 times (created by forecasts of an 11% earnings rebound from City brokers), I believe the stock could deliver plenty of upside at current prices.
Crude concerns
I am certainly not as compelled by the investment prospects of oil explorer Enquest (LSE: ENQ) however, even as its mighty Kraken asset prepares for first oil.
The London-based firm announced on Thursday that the North Sea project remains on track for maiden production by the end of next month following “further excellent progress on drilling.”
As a consequence Enquest stressed its confidence in meeting this year’s production and capital expenditure targets (the driller expects to pull between 45,000 and 51,000 barrels of oil equivalent out of the ground each day in 2017).
Enquest maintained its guidance even as it advised of declining production during the first four months of the year. Average production of 37,856 barrels per day between January and April was down from 42,752 barrels in the same 2016 period, a decline Enquest put down to “natural declines in the existing producing assets.”
Undoubtedly Enquest carries boatloads of production potential, its Kraken asset being one of the hottest properties off the coast of Britain. Still, the murky state of the broader oil market means that Enquest may fail to generate the sort of revenues many are hoping for.
When you also throw up the obvious operational uncertainties associated with extracting oil, I reckon Enquest is a risk too far right now. And a forward P/E ratio of 15.9 times (created by an anticipated 78% earnings drop) fails to fairly reflect the possibility of earnings downgrades further down the line, in my opinion.
