Premier Foods (LSE: PFD) is a FTSE 250 stock I’d buy right now. The shares have increased by 10% since the beginning of the year and almost 30% during the past 12 months. But I reckon it can push higher.
On Friday the company released a trading statement that resulted in the FTSE 250 stock soaring by almost 5%. I first commented on the company when it reinstated its dividend after 13 years in May. I thought this was a turning point for the firm because it shows Premier Foods is in a good financial position to be making income payments.
The numbers
It was a short announcement from the company but it was definitely packed with a lot of punch. Total sales for the 13 weeks to 3 July grew 6.3% on a two-year comparison. And this was at the top end of the company’s expected range of 5-6%.
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It’s worth remembering that 2020 was an unusual period. So if sales are compared to last year then quarterly revenue is lower as many consumers were eating their meals at home. But online sales were similar to the high levels seen in 2020 and almost double that of 2019.
Brands
Premier Foods has many well-known brands, which are key to delivering growth. In fact, total branded revenue during the quarter increased by 9.3% compared to two years ago. It shows that its brand-building model is, so far, delivering.
Part of the FTSE 250 firm’s growth strategy is to enter new product categories. And this has certainly been gathering pace. Its Sweet Treat branded sales improved by 3.2% versus 2020 as Mr Kipling continued to grow strongly, with an increase in sales of 7.5% in the quarter. TV advertising, its healthier product range (including 30% less sugar Angel Slices) and new product launches under its premium range have been paying off in this division.
I hope to see more of the same from Premier Foods going forward. The strategy of investing in its brands and bringing in new products has been delivering to date. So I think it’s a case of just carry on.
Outlook
The firm has started its financial year with great momentum. It even reckons that with its “branded growth model strategy and a material reduction in interest costs from the 3.5%, £330m Fixed Rate bond issued in Q1, adjusted PBT for FY21/22 is now expected to be at the top end of its expectations”.
This is certainly a positive sign. While it’s still early days, this is another step in the right direction for the company.
Risks
Of course there’s no guarantee that Premier Foods with be able to meet the profit target. Rising costs and increased competition could hinder growth and impact profitability. There’s also no certainty that the positive momentum seen in branded sales will continue after the pandemic. That’s especially so as people can now socialise in the UK without the tough lockdown restrictions.
Despite these concerns, I reckon the FTSE 250 stock could rise higher. The shares also trade on a cheap valuation with a price-to-earnings (P/E) ratio of 9x. I’d buy the stock.
