Meteor stock growth driven by acquisitions…

Premium Brands Holding is one of Canada’s largest food companies and ranks amongst the largest sandwich companies in North America. The company owns a wide range of specialty food manufacturing and food distribution businesses.

It operates through a network of 49 facilities and distribution platforms in Canada (63% of 2018 sales) and the U.S. (35%) serving more than 22,000 customers. Exports accounted for 1.7% of the sales. The company has two reportable segments, specialty foods (~65% of revenue) and premium food distribution (~35%). Premium Brands has operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and in Arizona, Minnesota, Mississippi, Nevada, Ohio, and Washington.

Premium Brands Holding is known for its leading regional brands and product differentiation and is driven by the customers’ preference for local foods. By products, sandwiches (23% of sales), premium processed meats (16%), seafood (10%), burger patties (6%), deli products (4%), meat snacks (4%), etc. accounts for the majority of the company’s sales.

Investment Data

Revenue Growth & Market Exposure

Premium Brands is highly diversified across businesses, products, customers, and geography. This diversification significantly reduces any single business risk. Its customer base includes regional and specialty grocery retailers, restaurants, hotels, and institutions. Premium Brands deals in specialty food products with regional local brands providing high product differentiation. Specialty food businesses are characterized by higher and consistent selling margins relative to other types of food manufacturing companies. The specialty food business faces less competition from large food companies and generate higher sales growth when compared to them.

Expertise in manufacturing specialty food products with strong proprietary brands in the leading niche market and differentiated food distribution are Premium Brands’ key competitive advantages. In its differentiated food distribution business, Premium Brands offers specialized products and services in addition to logistical solutions. The company enjoys a significant advantage to gain from emerging consumer trends.

Over years of business, Premium Brands has developed a good understanding of consumer tastes and preferences. Given the rising consumer health awareness, the company has been investing in businesses that focus on producing high quality, authentic specialty foods. Premium Brands operates through its portfolio of valuable brands, such as Deli Chef, Oberto, and Country Prime Meats.

The company has been expanding aggressively through acquisitions and has invested $1.7 billion in 55 transactions since 2005. Premium Brands’ revenues have grown at more than 24% CAGR in the last decade. It is targeting revenue growth of 6% to 8% over the long term and in the range of $3.66 billion to $3.72 billion for 2019.

Dividends

Premium Brands is a Canadian Dividend Aristocrat with a solid history of dividend payments. The company has paid more than $400 million in dividends since 2005 and has grown them at an impressive 11% CAGR over the last three years. Its current dividend yield stands at 2.5% with a dividend payout ratio of 72%. Premium Brands has a proven history of growing revenues and cash flow. Its earnings have grown at 25% CAGR since 2010.

Premium Brands’ stock performance has been stellar generating a compound annual shareholder return of more than 22% over the last 15 years. The company last raised its quarterly dividend by 10.5% to $2.10 per share on an annual basis. It also has an impressive history of reducing its free cash flow payout ratio from more than 100% in 2006 to 39% currently as per their investor presentation.

Make sure to compare apples to apples with the competition. EPS Dividend Payout Ratio tends to be the standard way until a company decides to pay based on funds from operation (FFO) or free cash flow (FCF). Do your homework. Lots of growth above but lots of acquisitions too, are the acquisitions hiding what would otherwise have been revenue miss?

The company underwent several strategic acquisitions in 2018, positioning it to succeed in North America and nearing its target of doubling the size of its business over the next five years. Premium Brands is favorably placed to gain from the potential of its several recently completed transformational acquisitions.

Competition

The food processing industry is extremely competitive. Premium Brands faces competition from the likes of Saputo Inc., Maple Leaf Foods, SunOpta Inc., Neptune Wellness Solutions, etc. Saputo Inc. is one of the top ten dairy processors in the world and the largest cheese manufacturer in Canada, while Maple Leaf Foods is Canada’s largest food processor and a leading consumer protein company.

Bottom Line

Premium Brands’ premium food distribution business enables it to generate and sustain additional margins. As North America’s leading specialty foods company, Premium Brands is well positioned to benefit from new product launches, sales opportunities in the U.S., and a robust pipeline of business acquisition opportunities. The company should gain from its dominance in the specialty food industry and should comfortably continue its double-digit dividend growth streak in the future as well.

The graph below is amazing and the numbers are generally great. With that said, there are some data points that I am not too keen on. The stock has a low Piotroski-F Score at 3 and that’s probably due to their string of acquisitions in the past which could be something that needs monitoring. The company focuses on free cash flow payout ratio instead of the standard EPS dividend payout ratio which is relatively high. The question now is where is the company going from here? Will success be organic or from acquisition?

I am sure many investors love this stock but it’s a pass for me. I am not sure about consistency after the meteor growth. I prefer Alimentation Couche-Tard TSE:ATD.B.

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