Pat McKeough responded to a Member of his Inner Circle who had a question about one of Canada’s largest distributors of food products.
Premium Brands Holdings distributes food through two different businesses to a wide variety of outlets, from restaurants to hospitals. Its sales and earnings have grown steadily in recent years. The company continues to spur growth with a series of acquisitions; it has made four in 2018 alone. This stock benefits from a strong balance sheet, says Pat, and focuses on buying smaller companies with strong niche markets, but growth by acquisition always adds risk.
Q: Pat, can you please comment on Premium Brands? Thank you.
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A: PREMIUM BRANDS HOLDINGS CORP. (symbol PBH on Toronto; www.premiumbrandsholdings.com) took its current form on July 22, 2009, when it converted to a corporation from an income trust. Before the changeover, it was called Premium Brands Income Fund.
The company operates through two businesses:
Specialty Foods supplies 67% of Premium Brands’ revenue and mainly serves food sellers such as delicatessens, specialty grocery chains, convenience stores, national and regional grocery brands and warehouse clubs. The business also sells to cafés that offer premade foods such as sandwiches, wraps and pastries.
Specialty Foods’ brands include Harvest, Grimm’s, Freybe, Hygaard, Quality Fast Foods, Hempler’s, Made-Rite Meat Products, Creekside, Stuyver’s Bakestudio, Duso’s, SK Food Group, Deli Chef, SJ Irvine, Piller’s, Isernio’s, Expresco and Belmont Meats.
The Premium Food Distribution business (33% of overall revenue) serves restaurants, concessions, bars, caterers, hotels, schools and hospitals. Its brands consist of Centennial Foodservice, B&C Food Distributors, Harlan Fairbanks, Worldsource, E1even, Wescadia, Maximum Seafood and Hub City Fisheries.
Premium Brands tends to fuel its growth through acquisitions.
Largely due to acquisitions, overall sales rose 179.2%, from $788.0 million in 2011 to $2.2 billion in 2017. Overall, earnings rose from $0.68 a share (or a total of $13.1 million) in 2011 to 2.70 a share ($80.5 million in 2017.
Growth stocks: Company has completed four acquisitions in 2018
Meanwhile, Premium Brands continues to make acquisitions:
In March 2018, it bought Concord Premium Meats for $170 million. Concord supplies a variety of fresh and frozen meat products and other processed food products to retailers and foodservice distributors across Canada.
In March, Premium Brands also acquired the following: The Meat Factory Limited, a Hamilton, Ontario-based manufacturer and distributor of beef, pork, chicken and turkey products across Canada; Country Prime Meats Ltd., a B.C.-based maker and distributor of meat snacks; and Frandon Seafoods Inc., a Montreal-based distributor of fresh and frozen fish and seafood to the foodservice industry in Quebec and Ontario. The total cost for all of these purchases was $57 million.
In April 2018, Premium Brands bought Oberto’s, a Seattle, Washington-based manufacturer of beef jerky and other protein-based snack foods. The purchase price was $185 million U.S.
In September 2018, the company acquired Ready Seafood Co., one of the leading processors, distributors and marketers of lobsters in the U.S. The price was an estimated $90.0 million. Portland, Maine-based Ready has three production facilities, all located in Maine.
As a result of new operations, Premium Brands’ sales rose 31.9% in the three months ended June 30, 2018, to $761.5 million from $577.4 million a year earlier. Earnings in the latest quarter, excluding one-time items, jumped 25.4%, to $35.0 million from $27.9 million. Due to more shares outstanding, per share earnings gained 17.0%, to $1.10 from $0.94.
The company’s growth by acquisition adds risk, but it minimizes the risk of any individual purchase by buying mostly smaller businesses that operate in niche markets. As well, despite its acquisitions, Premium Brands’ balance sheet is sound. Its long-term debt of $931.9 million (as of June 30, 2018) is a manageable 31% of its market cap. The company also held cash of $15.7 million.
Premium Brands is forecast to earn $5.31 a share in 2019, and the stock trades at 13.0 times that estimate. The company raised its quarterly dividend by 13.1% with the April 2018 payment, to $0.475 per share from $0.42. The shares now yield 2.2%.
Inner Circle recommendation: Premium Brands is okay to hold for aggressive investors only.
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