Investors who are able to look past a company’s short-term challenges can generate great returns. Over the last five years, one FTSE 250 stock has been a great illustration of this.
The Premier Foods (LSE:PFD) share price has gone from 45p in 2020 to over £2 today. And there’s an important lesson for investors in this.
What’s happened?
Premier Foods isn’t a particularly dynamic business. It manufactures a range of branded and own-label packaged foods, ranging from cakes to cooking sauces.
It’s the type of company where returns tend to be steady, rather than spectacular. But over the last five years, both the business and the stock have done incredibly well.
Sales have increased, margins have widened, and the company has reinstated its dividend. And this has caused the share price to rise sharply.
One of the key improvements has been the firm’s balance sheet. Since 2020, long-term debt has decreased from £501m to £326m, resulting in lower interest payments and higher profits.
This, however, looks unlikely to continue. The company is now in a strong financial position, so I’m wary of how much scope there is for future improvements on this front.
As a result, I’m looking around for the next major opportunity. And there’s a stock that’s been catching my eye recently as one to take a closer look at.
The next big thing?
Rentokil Initial (LSE:RTO) has a lot in common with Premier Foods. It operates in an industry where demand is relatively stable and it has a significant competitive position.
Like Premier Foods in 2020, Rentokil also has a lot of debt on its balance sheet. Long-term borrowings are roughly double where they were five years ago.
This, however, is the result of a big acquisition in 2022. And I think as the debt level decreases and interest payments fall, there’s a decent chance of profits moving higher.
Earlier this week, though, the company hit a setback as CEO Andy Ransom announced his intention to retire in 2026. With the firm still in transition, a change in leadership is a risk.
Despite this, I think there’s clear scope for the company to keep moving forward. Signs of operational efficiencies are starting to appear and the debt level is starting to decrease.
I’m therefore optimistic that this might be a similar story to Premier Foods from five years ago. I’m not saying a 300% return is on the cards, but the two seem to have a lot in common.
Foolish takeaway
Rentokil’s recent results have been somewhat underwhelming. The integration of its big acquisition has taken longer than a lot of shareholders were expecting.
I think, however, there are clear reasons for optimism. And I’m struck by the similarities between the company right now and Premier Foods when I first saw it in 2020.
I missed out on the FTSE 250 stock back then because I was concerned about its debt levels. But I’m determined not to make the same mistake again.
