Can Premier Foods get back to the First Division?

Premier Foods (LSE: PFD) - SP= 85.75p, MCAP=£205.6m (at close 24/10/2012)

Premier Foods looks as though it is shaping up to be a classic recovery stock. At the beginning of October, I added it to one of the DIY-Investors Active Portfolios (replacing Shaftsinkers) and so far that looks to have been a good move. So in amongst my current plans to "Escape to the Country", what attracted me to it?

Well, you won't be surprised to hear that it was a combination of technical and fundamental indicators. I've summarised these below...

Technical Indicators

Back at the beginning of October, the PFD share price had nudged through the 50 day moving average, following a lateral breakout from the downtrend (marked by the orange line) that had been in place since the middle of June. On Friday 5th October, I bought PFD for the active DIY-Investors portfolio at 66.5p (having sold ShaftSinkers the day before). At the time, the SP graph looked like this...

You can see that, as is common, there was no increased volume to support the lateral breakout (17th September onwards) although the OBV broke up through the downtrend and the RSI was starting to show increasing strength. The clear breakthrough of the 50 day m.a. was the factor that tipped the balance for me, coupled with the general shape of the Share price graph over the medium term (see below):

Note that the low at the beginning of September 2012 was a higher low, compared to the lows of October/November 2011 (marked by the high volume).

Fundamental Analysis

Let's have a look at the Key Metrics (from Sharescope):

Background

 PFD has been burdened by the large debts (£1.2 Bn) taken on when it acquired Hovis and Mr Kipling group (RHM) in March 2007, just before the credit crunch and subsequent economic downturn. PFD has been facing an uphill battle since then, having to cover large interest payments, hefty bank fees and with the need to correct the large pension deficit.

Summary

Notwithstanding the above, the fundamentals do meet some of my criteria for a potential recovery stock, as follows:

• Low PSR (currently 0.12 [pr])
• Positive operating margin (+4.68% on last results - see Blue Arrow [above])
• Low P/E (currently 2.86)
• Improving Newsflow re. disposals etc.

Some of the more bearish counterpoints included:

• Level of debt
• Pension issues
• negative cashflow in y/e 31.12.2011 (see orange line on key metrics)
• negative tangible book value
• slight fall in turnover

As usual, as a DIY-Investor, I am quite happy to weigh up the evidence and dip my toe in the water (buying my initial holding) based on my own judgement. So far, so good and I can see the potential for more upside on the share price.

Why not take a look and see what you think about the recovery prospects for PFD?

Be sure to let me know your verdict!

Mick.