A former FTSE 250 penny stock I’d buy with £2k

Over the past 10 years, Premier Foods (LSE: PFD) has transformed itself from a struggling penny stock into an FTSE 250 growth star. 

Now the enterprise is entering a new stage of its life. The recovery is complete, and management is looking forward, focusing on the company’s growth potential over the next few years. 

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As the firm embarks on this next stage in its journey, I would buy £2k worth of shares for my portfolio. 

FTSE 250 growth prospects 

Premier was one of the country’s biggest food businesses in the mid-2000s. Unfortunately, the organisation crumbled in the financial crisis as its highly-leveraged balance sheet became impossible to manage.

In the decade following the crisis, the firm focused on reducing debt, selling off businesses, and managing its vast and complex pension schemes. 

The transformation was making solid progress, and then the pandemic arrived. Unlike many other businesses, Premier had a great pandemic. The home cooking trend pushed the demand for its foodstuffs through the roof. For the fiscal year ending May 2021, the firm reported a near-12% increase in revenues. 

This growth generated a profit windfall for the group. Management used these funds to accelerate the firm’s recovery plan, further reducing debt and getting to grips with the pension obligations. 

As the firm has shaken off the shackles of debt, it has been able to plough more money back into the business. Over the past five years, its annual interest obligations have fallen from £46m to £30m. To put this £16m decline into perspective, the business generated a net profit of just £8m in its 2018 financial year. 

According to the company’s latest trading update, it forecasts a trading profit of £125m for the current year. Debt is expected to fall further, and more money is being invested back into growth. 

Shedding the penny stock label 

A particular area of growth for management is its international business arm. International sales are up 33% compared to 2019 levels, and the FTSE 250 firm wants to boost growth further.

Investing abroad seems like a great idea, but it also comes with risks. The international food and drinks market is incredibly competitive.

There is no guarantee the firm will achieve a return on its investment. This could end up becoming a money pit for the business. Premier came close to collapse in the financial crisis after trying to expand too far, too fast. There is no guarantee this will not happen again. 

Despite this risk, I am excited about the company’s potential. The business has already grown out of its penny stock label, and the shares could rise further in the years ahead.

Even though the stock has added 30% over the past year, the shares are still selling at a relatively undemanding forward price-to-earnings (P/E) ratio of 10.2. Many of its peers command mid-teens P/E multiples. 

Considering this valuation and the group’s growth potential in the years ahead, I would be happy to invest £2k of my hard-earning money in this business today.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This post was originally published on Motley Fool

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