Is the Premier Foods share price in bargain territory?

Mr. Kipling owner Premier Foods (LON:PFD)has been cheap for years - and with good reason. An ill-timed, debt-fuelled spending spree brought the company to its knees in the wake of the 2008 financial crash. Ever since then,  the UK food processor has been trying to bring debt down, all the while wrestling with large pension fund commitments and periodic trading issues.

The fact is cheap shares are often cheap for a reason. They can look unappetising. And, while the evidence shows that maintaining a value strategy through boom and bust will be rewarded, sticking with it is actually extraordinarily hard. Yet the evidence is so compelling that value is one of Stockopedia's three main factors in investment returns.

One of the masters of value (and factor) investing is Jim O'Shaughnessy, the founder of O’Shaughnessy Asset Management (OSAM). In the 4th edition of his groundbreaking investment research tome What Works on Wall St, O’Shaughnessy showed that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.

It was from this robust insight that Stockopedia’s Value Rank was born, its synergy coming from the following simple valuation ratios:

• Price to Book Value
• Price to Earnings
• Price to Free Cash Flow
• Dividend Yield %
• Price to Sales
• Earnings Yield %

How does Premier Foods stack up?

The Value Rank: how does Premier Foods stack up?

We can see by using Premier Foods’s StockReport that the group has a:

• Rolling price to book value of 0.33,
• Rolling price to earnings ratio of 4.49
• Trailing twelve-month price to free cash flow of 7.48
• Rolling dividend yield of 0.000%
• Trailing twelve-month price to sales ratio of 0.36

When we add all of these together, we find that Premier Foods has a Value Rank of 88. Investing in high-value stocks requires finesse and a sturdy constitution but, when cheap stocks come good, the payoff can be large and sudden.

Premier Foods’s Value Rank of 88 puts it in the cheapest quartile of the stock market. That is certainly a promising jumping off point for our analysis but it is not the whole story. The group still has its financial risks. Its pension deficit has turned into a combined surplus in recent years, but pension payments continue to use up cash, and there is no guarantee that these payments will not increase at some point in the future.

Nevertheless, there are signs of life beneath the surface at this risky turnaround play. A group of activist shareholders is agitating for strategic solutions, and Premier Foods does have a stable of brands to play with.

One way of mitigating the risks of value stocks is to find the best quality value stocks or value stocks whose share prices are turning around - history shows that you can do much better than a passive investor by combining factors, so it makes sense to consider the Value Rank alongside the Momentum and Quality Ranks on Premier Foods' StockReport.

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Premier Foods that you can find out about here.