Should You Investigate Premier Foods plc (LON:PFD) At UK£1.24?

Premier Foods plc (LON:PFD), might not be a large cap stock, but it saw a double-digit share price rise of over 10% in the past couple of months on the LSE. As a small cap stock, which tends to lack high analyst coverage, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Today I will analyse the most recent data on Premier Foods’s outlook and valuation to see if the opportunity still exists.

View our latest analysis for Premier Foods

Is Premier Foods Still Cheap?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 11.58x is currently trading slightly below its industry peers’ ratio of 13.46x, which means if you buy Premier Foods today, you’d be paying a decent price for it. And if you believe Premier Foods should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. So, is there another chance to buy low in the future? Given that Premier Foods’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.

What does the future of Premier Foods look like?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with a negative profit growth of -9.8% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for Premier Foods. This certainty tips the risk-return scale towards higher risk.

What This Means For You

Are you a shareholder? PFD seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on PFD, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on PFD for a while, now may not be the most advantageous time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help gel your views on PFD should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing Premier Foods at this point in time. Every company has risks, and we've spotted 1 warning sign for Premier Foods you should know about.

If you are no longer interested in Premier Foods, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.