I have been bullish on food companies for a long time, and the rise in the stock price of Premium Brands Holdings Corp. (TSX:PBH) is of no surprise to many long-term investors. Premium Brands’s portfolio of business lines include McSweeney’s, Direct Plus, Conte Foods, Larosa Foods, OvenPride and Island City Baking — brands which underpin a significant percentage of food service sales in the Canadian market.
The food industry itself is a relatively stable one, with a number of excellent options available to investors looking to cash in on long-term growth trends among food companies with an innovative edge and ability to effectively acquire and integrate new businesses into a portfolio to generate synergies and long-term value in a robust and growing sector such as food service.
I’m going to discuss one of the fundamental drivers I believe will put downward pressure on Premium Brands’s share price, at least in the intermediate term.
Growth-by-acquisition model difficult to execute long term
Looking at the performance of Premium Brands’s management team in delivering excellent top- and bottom-line growth in recent quarters, it may be difficult for some to fathom a deterioration in the share price of a company which may otherwise be considered reasonably valued, with a price-to-earnings (P/E) multiple of 37. Given the company’s recent performance in delivering year-over-year revenue and EBITDA increases of 25% and 43%, respectively, such an earnings multiple can easily be justified, with some analysts suggesting additional stock price appreciation may be on the horizon.
That said, sustaining double-digit growth rates above 20% in the years to come (as forecasted by analysts) is a tough challenge for any company, and I expect some profit taking for investors who have seen their equity more than quadruple in value begin to take money off the table should Premium Brands’s share price begin to plateau, putting downward pressure on said share price in the medium term.
Bottom line
With many other food-related businesses feeling the pinch of the recent Amazon.com, Inc./Whole Foods merger, companies like Premium Brands should be able to effectively maneuver this periodic blip and continue to provide excellent value to long-term shareholders willing to buy and wait.
For investors looking for an attractive entry point, however, I would encourage taking a look at other more attractively priced options on the TSX and abroad and wait for a better valuation for Premium Brands, given the aggressive multiple expansion many North American companies have experienced of late, which has driven the vast majority of the increase on the domestic exchange.
Stay Foolish, my friends.
