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Why I’d ditch this falling knife and buy Legal & General Group plc

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Finsbury Food Group (LSE: FIF) was back on the defensive in start-of-week business with the AIM-listed business last 2% lower on the day.

It has seen its share price decline 16% over the past three months, culminating in today’s decline to a two-year trough. While this drop can hardly be considered nosebleed territory, I fully expect the Cardiff-based firm to remain locked in a downtrend as trading conditions become ever-more difficult.

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Finsbury Foods, which supplies cakes, bread and morning goods for the retail and foodservice channels, announced today that while pre-tax profit rose 10% to £13m during the 12 months to June 2017, revenues clocked in at £314.3m in the period. This means that turnover on a like-for-like basis stagnated from the previous fiscal year.

Chief executive John Duffy, lauding last year’s performance, commented: “The [full year] results show strong resilience to the current challenges facing the industry and this strong performance, which has seen sales increase and profit margins improve, is testament to our long-term focus on driving efficiency and scale across the group.

“Investment to date has paid off and the initiatives implemented during the year will continue to ensure that we maintain our robust position as a low-cost and leading speciality baker in the UK over the next 12 months and beyond,” he added.

Leave it on the shelf

I am not so convinced by Finsbury Foods’ investment appeal right now, however.

The company has invested huge sums to light a fire under the bottom line and overcome the difficult trading environment, like the opening of a brand new artisan bread facility and creating a state of the art cake line, which is due to come online this year. As well, Finsbury Foods can also point to robust demand for fresh product ranges like the new collection from baking queen Mary Berry as reasons to be optimistic.

And against this background, the City expects earnings to rise 3% in the current fiscal year, resulting in an undemanding forward P/E ratio of 9.9 times.

However, Finsbury Foods faces colossal troubles that could blow these estimates off course. Indeed, I believe share pickers should remain cautious in the face of stagnating sales and rising input costs, the latter primarily caused by the introduction of the National Living Wage and the impact of sterling weakness on ingredients prices.

I reckon Finsbury Foods is one to miss right now despite its relatively-low valuations.

Global star

Given the choice, I would much rather plough my investment cash into Legal & General Group (LSE: LGEN).

I expect business to continue surging at the financial giant thanks to its concentration on key demographic drivers like an ageing global population, the move to digitalisation, and reforms of the Welfare State. Indeed, these factors helped push pre-tax profit 43% higher during January-June, to £952m. And it is expanding in the States to give profits an extra push in the years ahead.

The number crunchers expect Legal & General to record earnings expansion of 11% in 2017, creating a very-undemanding forward P/E rating of 10.3 times. And if this wasn’t enough, a predicted 15.2p per share dividend creates a terrific 6% yield. I reckon the company is a compelling pick at the current time.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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