Stock Pitch: B&G Foods – undervalued consumer staple with near 6% dividend yield

Today’s stock pitch probably has products in your kitchen cabinet, but you never knew it was this company. At least, that’s what I found out. B&G Foods sells a portfolio of shelf-stable and frozen foods. I’ve snagged a picture from their website of all their brands — tell me if you spot anything you can recognize!

bg-products3

That’s right. I know I have Green Giant in my freezer, along with Baker’s Joy, Ortega, and many more in the past. So why is this a good investment? First, the positives:

  • Food staples inherently are more resilient in down cycles (everyone needs to eat)
  • B&G has a wide product portfolio, limiting reliance on any one successful product or brand
  • The company has very high EBITDA margins (~22%) and very little capex (<3% of sales) which translates into strong free cash flow (FCF)
  • B&G uses excess cash flow to reward shareholders via 1) high dividend (currently 5.7%) and 2) grow the business via acquisitions
  • Its a simple business

For the last point, I just want to highlight something that Warren Buffet once said that I agree strongly with:

“So I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they are going to be ten years from now. And if I can’t see where they are going to be ten years from now, I don’t want to buy them.”

Compare this to a technology company where things change so rapidly, companies that were once stars get vaporized… Looking at you SNAP…

Alright, I digress – back to B&G. We’ve highlighted the pros which I’ll come back to, but B&G’s stock is sitting at almost a 2 year low. Lower than when it announced it was buying Green Giant, which was a large $760MM acquisition. What happened? Well, as you can probably tell from the picture, B&G has very mature brands with slow and even declining growth in some cases. Its most recent quarterly print showed declining growth in its base which alarmed investors. The double whammy comes from high leverage, which B&G has because it is very acquisitive and uses debt to fund them.

First on the leverage, the debt is high and will probably remain somewhat high in the near future. Leverage will likely be around 4.8x by year end. Now, one thing people often confuse is high leverage on a good or bad business. For example, 4.8x leverage on a company that is highly cyclical or unpredictable and is only worth 6x EBITDA is extremely risky as the implied equity cushion is only 20% (to back into that math, take the 6.0x of enterprise value – 4.8x of debt = 1.2x of equity. 1.2x / 6.0x = 20%). But 4.8x of leverage on a company that is very predictable, cash flows very well and therefore worth 10-13x EBITDA is much less risky (12.0x-4.9x = 7.1x of equity value).

B&G’s portfolio does have very mature assets though, which is part of the reason for the decline, but B&G has had success revamping brands and is doing so currently. My thesis is that these headwinds will abate in the coming quarters.

For example, it is revamping Green Giant in the frozen section. Sales in the latest Q were up 14% and is launching 5 new products this quarter with more innovation coming in the 1H’18. As you can probably recall, before Green Giant was sold to B&G, it was a sleepy brand that was facing stiff competition.

Now for the other products, in general, this latest Q had pressure on the whole category, not just B&G. As mgmt said on the call,

“Net sales for most of our other brands, including Ortega, Bear Creek and Mama Mary’s, were down for the quarter, generally in line with their overall categories. We estimate that consumer consumption in the categories that we compete in are down on average approximately 3%. In general, this is not a distribution loss issue, just very difficult category dynamics”.

Mgmt expects to grow the base business 2% in the 2H and they also have cost actions in place to improve margins (plant consolidation, shifting some production in house, etc). So in sum, I think the sell off that has occurred with B&G is overdone and I think the stock looks attractive here.

Here’s my summary model below and I think I’m being relatively conservative. For one, I’m at the low end of mgmt’s EBITDA guidance, but as you can also tell I am not projecting much top line growth going forward. Even so, you can see the cash really starts to build. In reality, B&G likely goes out and buys something else instead of sitting on that cash.

Importantly, we’ll also be getting that near 6% dividend yield as well, so even if the stock is stagnant, clipping that coupon is nice in this market.

At 12x EBITDA, I see ~35% upside over the next ~12 months with more like 55% upside when I look out to 2019 (as we get into late 2018, investors will begin to price the stock on 2019). And don’t forget, that’s the upside if they don’t go out and acquire something, which I bet they will in a couple years.

BGS Model Summary

Let me know what you guys think or if you have questions.

–DD

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