Do Today’s Revelations Make Sports Direct International Plc And Premier Foods Plc Strong Buys?

Announcements this morning on the stock exchange’s Regulatory News Service (RNS) from Sports Direct (LSE: SPD) and Premier Foods (LSE: PFD) were chalk and cheese. The former’s’ statement amounted to a terse 48 words and was bad news for the share price; the latter’s was rather longer and sent the shares rocketing.

Bad sport

Sports Direct’s statement read, in its entirety:

“In the light of recent press coverage, Sports Direct wishes to clarify that its current expectations for adjusted underlying EBITDA (before share scheme costs) for the full year to the end of April 2016 are at or around the bottom of the range announced on 8 January 2016”.

The press coverage referred to was an interview in The Times with founder and majority shareholder Mike Ashley. The Times quoted Mr Ashley as saying: “We are in trouble, we are not trading very well. We can’t make the same profit we made last year”.

Profit warnings are supposed to be issued by RNS so as not to create a false market, so readers of The Times got the jump on other investors. Sports Direct’s shares fell over 10% on the day, and are currently down a further 5% today at 360p.

The troubled company has faced media allegations of ‘Dickensian’ labour practices at its ‘gulag’ Shirebrook warehouse, MPs are on the warpath, and City concerns about corporate governance are ongoing. Meanwhile, a poor trading performance has wiped £2.8bn off Sports Direct’s £4.9bn market valuation of last summer, resulting in the company being kicked out of the FTSE 100.

The new earnings guidance suggests a price-to-earnings ratio of about 10, but bearing in mind the old adage that profit warnings come in threes, I’m not going to be rushing in to buy Sports Direct shares at this stage.

Food for thought

Premier Foods is the owner of a host of familiar brands, including Bisto, Mr Kipling and Sharwoods. The company was brought to its knees a few years ago by over-expansion, debt, and a whopping great pension deficit.

Restructuring and recovery has been a long slow process, but progress has been made, and today’s announcement from the company shows that it has reached the point where trade buyers are getting interested in the business.

Premier today revealed it had received an unsolicited approach from US herbs and spices group McCormick & Company. McCormick made an indicative cash offer at 52p a share on 12 February, subsequently raised to 60p a share on 14 March.

Premier’s board have rejected the approach on the basis that it “significantly undervalues the Company and its prospects”, with chairman David Beever adding: “McCormick’s Proposal represents an attempt to capture the upside value embedded in Premier’s business that rightfully belongs to Premier’s shareholders”.

Premier’s shares are trading 65% higher at 52p, as I write, and if the directors are right about the undervaluation — and Premier is cheap on a number of objective measures — the shares could still be worth buying after today’s rise.

McCormick has until 20 April to make a firm offer. Meanwhile, Premier also said today that it has signed a cooperation agreement with Japan’s noodles specialist Nissin Foods. The deal could enable Premier to distribute Nissin’s products in the UK, while potentially allowing Premier’s products to be distributed in up to 19 countries worldwide that Nissin operates in.

Things are certainly looking up for Premier as an independent company, and with competitors now also eyeing it up, the stock could be a speculative buy at current levels, particularly as trade buyers often value brand-rich consumer goods businesses significantly higher than do equity markets.

Making sensible risk/reward judgements should enhance your returns from the stock market in the long run. And you can discover further simple steps towards boosting your wealth in the Motley Fool's FREE guide "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. There are no strings attached -- simply click here for your free copy.

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.