Raymond James analyst Michael Glen thinks Vancouver-based Premium Brands Holdings Inc. has “positioned itself as a leading innovator within the North American food industry,” leading him to initiate coverage with an “outperform” recommendation on Thursday.
“the company’s core strategy is to work with customers, developing new food products and solutions, which in turn drives consumer demand and organic growth,” he said in a report titled Assembled for Accelerated Growth. “Focal areas include the prepared sandwich, protein, and bakery markets. Looking historically, most growth was generated via expansion in Canada and also via M&A. As we move forward, growth will be driven by the U.S. market and follow an aggressive capital expenditure plan where PBH invested close to $700-million over the past 2.5 years. This program is now in the final stages. The products and categories expected to drive organic growth are largely contained in the Specialty Foods Group, with an emphasis on the Sandwich and Protein categories.
“Despite the capital investments to prepare for accelerated growth, with its 2Q report (August), PBH did highlight some near-term factors impacting results. These include delays associated with some large product launches, start-up costs, longer-than-expected onboarding timelines, which has been coupled with a weaker consumer backdrop. Another factor emerging with 3Q was a sales decline with one of its larger Sandwich segment customers which is being driven by lower traffic and ongoing strategic / operational changes within that organization. In terms of this situation, in looking at the public statements provided by this customer, we do believe that Premium Brands is well-aligned as a supplier to this organization, and the product they supply will continue to represent an important part of this customer’s food mix. That said, there could very well be some short-term headwinds on this specific item.”
Mr. Glen thinks investors have already priced in the company’s short-term headlines with its stock trading near $80 and below his 16.5 times 2025 estimated earnings per share projection.
“This multiple compares against a historical 5- and 10-year avg of 21.0 times and 21.6 times, respectively. In terms of peers, we have selected a group of largely U.S. based peers that are very relevant in various portions of the food distribution and manufacturing supply chain. This group of peers trades at 25.3 times 2024E EPS and 19.4 times 2025E EPS. Additionally, with the slower ramp and onboarding of customers, PBH has seen its leverage expand beyond its historical range. At the end of 3Q24, the senior debt to EBITDA ratio was 3.4 times (target range of 2.5-3.0 times), with the total debt (including debentures) to EBITDA ratio at 4.4 times (target range of 3.5-4.0 times). Within our model, we see leverage stabilizing at current levels before trending lower over the course of 2025 with an emphasis on 2H25.”
Believing it will be “exceptionally important” for investors over the next 12 months to monitor the company’s the sales build and new business launches associated with its five-year plan, he set a target of $100 per share. The average is $102.40.
“We believe that this multiple could expand into or above its historical average as management executes on its growth strategy, announces new business wins, and as sales ramp with new programs in the Specialty Foods segment,” said Mr. Glen. “Additionally, another factor that we believe could benefit the multiple is deleverage back into the company’s target range, which could be aided by actions being pursued with respect to a sale / leaseback transaction.”