Consumer goods company Premier Foods (LSE: PFD) has released a disappointing second quarter trading update today. In response, its shares have fallen by up to 13% and could move lower in the short run. However, could this be an opportunity to buy Premier Foods at a low ebb ahead of a long-term recovery?
It looks like the answer could be yes for investors able to tolerate some risk. Premier Foods’ sales declined by 5.4% versus the second quarter of the previous year. This was mostly due to a challenging performance within the company’s Grocery division. September experienced abnormally high temperatures and this had an adverse impact on demand for products within Premier Foods’ Gravy and Stocks category and in Desserts. They recorded reductions in volume of 13% and 9% respectively, which contributed to a Grocery branded sales fall of 9.5%.
However, Premier Foods is on track to meet full-year expectations. This is partly because of careful cost management, but also because its Sweet Treats division performed well. It reported a sixth consecutive quarter of growth, with sales increasing by 6.4%. Both branded and non-branded categories delivered increases from new products and new business wins. And with Premier Foods’ International division reporting sales growth of 13%, the overall picture for the business remains positive.
Looking ahead, Premier Foods is forecast to grow its top line by between 1% and 2% in the full year. Its medium-term sales growth target of 2%-4% is unchanged and shows that it’s making progress on strategic priorities such as product innovation and improving customer relationships.
With Premier Foods trading on a price-to-earnings (P/E) ratio of just 6.1, it seems to offer excellent value for money. That’s especially the case since it has adopted a more disciplined cost structure. Furthermore, with the Bank of England adopting a more dovish stance on interest rates, its debt pile may not pose as great a risk as is being priced-in by the market. Alongside improved financial performance, this could lead to an upward rerating.
Go for stability?
Clearly, fellow consumer goods company Unilever (LSE: ULVR) offers a lower risk profile than Premier Foods. It’s much more geographically spread than Premier Foods and has a wider stable of products. This means that it’s less susceptible to changes in weather or other localised external factors. As such, its share price performance is likely to be more resilient and stable than that of Premier Foods.
However, Unilever is much more expensive than Premier Foods, as evidenced by its P/E ratio of 24. Although this could move higher to match other global consumer goods companies, there’s less scope for an upward rerating than is the case for its smaller peer. But with Unilever having exposure to fast-growing emerging markets, its bottom line is likely to grow at a relatively fast pace in future.
Therefore, Unilever and Premier Foods both have significant long-term appeal. Unilever is a better buy for more risk-averse investors, while those investors who can live with higher risk may wish to buy Premier Foods.
