Unilever (LSE: ULVR) is one of the London markets most coveted stocks but doesPremier Foods (LSE: PFD) have what it takes to replicate the companys success and once again become appealing to investors?
Undervalued?
At the time of writing, shares in Unilever trade at a forward P/E of 19.4 while Premier Foods trades at only 5.6 times forward earnings. These metrics say a lotabout the fortunes of these two companies.
On one hand, you have an emerging markets star, owner of some of the most valuable consumer brands in the world, with sales growing at a steady 4% or more per annum. On the other hand, you have Premier Foods, a company that has struggled to get sales off the ground in recent years, is grappling with a mountain of debt and has only reported a profit once in the past five years.
Premiers problems stem from the companys pre-crisis debt-funded acquisition binge. At its peak, Premiers debt stood at 1.8bn, six timesearnings before interest, tax, depreciation and amortisation a ratio of more than two times EBITDA is usually considered high.
Over the past few years, Premier has been trying to reduce debt but nearly 200m of derivative costs, pension problems, and flagging sales have hampered turnaround efforts. Sales have contracted around 19% per annum since 2011, compared to Unilevers average revenue growth rate of 3.8% per annum since 2012. Unilevers net debt-to-EBITDA is less than one today while Premiers is still an elevated 3.5 times EBITDA.
Haunting debt
With such a hefty pile of debt still haunting the company, its clear that Premier will struggle to grow for some time to come.
At the end of the first half, the companys net debt stood at 556m, 29m lower year-on-year. At this rate, it will take more than a decade for Premier to get its debt back under control and thats without accounting for pension issues. The companys pension deficit amounted to 229m at the end of the first half.
Still, for the companys fiscal first half, sales rose by 2%reflecting the consolidation of acquisition Knighton Foods.
Foolish summary
Overall, City analysts are expecting revenue growth of around 5% for the year ending 31 March 2017 and a pre-tax profit of 68m has been pencilled-in, the companys first pre-tax profit for two years (and the second in six). A pre-tax profit of 72m is expected for the year after and if the company meets this lofty target, then theres hope for the group.
Nonetheless, considering the companys past troubles, debt and pension issues, Im not convinced that Premier is even a speculativebet. The shares may be trading at a highly attractive valuation but it looks as if theyre cheap for a reason and that debt pile means theres no hope of a dividend for many years.
All in all, Premier isnt the next Unilever. Unilever is still the best investment for long-term defensive investors.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
