Pat McKeough responds to many requests from members of his Inner Circle for specific investment advice, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
Recently an Inner Circle member asked us about a leading Canadian specialty food maker. Premium Brands draws two-thirds of its revenue from retail and the rest from food services. The company continues to expand aggressively and Pat assesses the flurry of acquisitions it has made in recent years. He considers the high debt Premium has assumed to make its acquisitions and whether it can continue to maintain its high dividend.
Q: Pat: Can you please give me your opinion of Premium Brands for income and gains in the specialty food sector? Thanks.
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 divisions:
Retail supplies 63% of Premium Brands’ revenue and mainly serves food sellers, such as delicatessens, specialty grocery chains, convenience stores, national and regional grocery chains and warehouse clubs. It also sells to cafés that offer premade foods, like sandwiches, wraps and pastries.
This business’s 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 and Piller’s.
The Foodservice segment (37% of revenue) serves restaurants, concessions, bars, caterers, hotels, schools and hospitals. Its banners consist of Centennial Foodservice, B&C Food Distributors, Harlan Fairbanks, Worldsource, E1even, Wescadia, Maximum Seafood and Hub City Fisheries.
Premium Brands continues to expand by purchasing other food companies. In March 2013, it paid $55.0 million for Langley, B.C.-based Freybe Gourmet Foods, a maker of deli meats and other products. Following this purchase, Premium closed its deli-meat processing plant in Richmond, B.C., and transferred its production to Freybe’s facility.
Passing higher pork and beef prices on to customers should boost earnings per share
In the three months ended June 28, 2014, Premium Brands’ sales rose 15.5%, to $322.3 million from $278.9 million a year earlier.
However, earnings fell 30.4%, to $3.7 million, or $0.17 a share, from $5.3 million, or $0.25. If you exclude restructuring costs and adjust for the $4.2 million in profits the company lost due to a spike in pork and beef prices, it would have earned $10.1 million, or $0.46 a share, in the latest quarter.
Expanding by acquisition adds to the company’s risk. As well, its total debt stands at $360.4 million, or a high 67% of its $538.0-million market cap.
Premium Brands trades at 20.2 times its forecast 2014 earnings of $1.20 a share. However, it is passing on higher pork and beef prices to its customers through an approximate 8% price increase, so its earnings should rise to $1.59 a share next year. The stock trades at a more reasonable 15.3 times that estimate.
In addition, the company should benefit from the projects it has completed over the past three years, including Stuyver’s new artisan bakery, Deli Chef’s new sandwich plant, Centennial Foodservice’s new seafood processing facility and SK Food Group’s new $21.6-million U.S sandwich plant in Ohio.
Meanwhile, the $0.3125 quarterly dividend gives the shares a high 5.2% yield.
We view Premium Brands as a hold.
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Pat McKeough responds to many requests from members of his Inner Circle for specific investment advice, as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “Our Top U.S. Stocks” on Thursday.
