Despite efforts at controlling inflation from central banks, prices are set to climb higher, a trajectory which could include the Premier Foods share price. Such a turn of events would continue a strong recent trend, but as prices for goods soar, the company could also be at high risk of losing out to inflation.
Rising inflation and cost of living isn’t bad news for every stock. Take the Premier Foods [PFD.L] share price, for example, which is currently on the up.
Perhaps this is unsurprising as the owner of well-known brands like Cadbury, Bisto and Mr Kipling could be considered a defensive play for these pessimistic times. However, with inflation comes rising costs for goods, which could eat into the company’s profit margins.
What’s happening with the Premier Foods share price?
The Premier Foods share price has soared 171.22% over the past two years to close Friday 27 May at 119.2p. Last year lingering Covid restrictions helped as more people were cooking at home and avoiding restaurants and pubs.
Rising food prices could act as a catalyst for the stock, which has gained roughly 6% this year. April was a heavy meal for investors as the stock fell from a 52-week high of 127.2p on 3 April to bottom out at 107p by the close of trading on 8 May. Yet, since that point the stock has risen sharply, with better than expected earnings going down well with shareholders.
Is inflation good or bad for the Premier Foods stock?
Inflation gave Premier Foods’ revenue a helping hand in the 52 weeks to the start of April. Sales came in at £900.5m, with pre-tax profit at £102.6m. While the results were down from the previous year, which benefitted from coronavirus restrictions and a windfall from the sale of bread maker Hovis, they showed that the company is still in good health. Trading profits for the year increased 11.9% to £148.3m.
Confectionary brands were a big seller, with the Mr Kipling range of cakes enjoying a record-breaking year thanks to expansion in Australia and Ireland.
Chief executive Alex Whitehouse said that market share grew as inflationary pressures meant that customers were ditching takeaways and restaurants and turning to “brands they trust”.
“Over the last year, we again saw market share gains across both our grocery and sweet treats businesses versus two years ago, and in recent weeks we’ve actually seen those market share gains strengthen further,” he said.
Whitehouse added that the company expects this trend to “continue as consumers increasingly turn to creative ideas to save money and reduce waste when preparing food, so for example batch cooking and freezing leftovers”.
Still, the counter-argument is that, as things become more expensive, consumers may choose to pass up the more costly products that Premier Foods owns in favour of supermarket own brands. After all, UK inflation hit 9% in April — the highest it has been for four decades as food and energy costs soared.
“While the Mr Kipling range has just enjoyed its best year ever, Premier Foods faces the risk that shoppers will trade down to cheaper, own-brand alternatives amid big pressure on household budgets,” commented AJ Bell investment director Russ Mould.
The four analysts offering 12-month price targets for Premier Foods have a median target of 141p according to the FT, with a high estimate of 145p and a low estimate of 119.66p. The median estimate represents a potential upside of 18.3% from last week’s close at 119.2p. The company also has a positive outlook overall from analysts following the stock, with three ‘buy’ and one ‘hold’ recommendation. For income seekers, the stock has a modest 0.84% forward yield.
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