Q4 Recap: B&G Foods posts disappointing Q. Time to exit or is it worth sticking around for the 7.2% dividend?

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Now that Q4 earnings season is approaching its end and Q1 will begin ramping up before we know it, I wanted to provide a recap of earnings of stocks I’ve favorably mentioned here.

Unlike my last review on TWNK, this company’s Q4 did not go over well. The Green Giant has stumbled and is facing some challenges, and so the market is concerned… Is it time to cut and run?

B&G reported Q4 EBITDA of $69MM, well below consensus estimates of $98MM. Sales were up 15% due to acquisition contributions and the base business sales were down slightly, excluding lost business at Walmart & Sam’s previously disclosed. The main driver of the miss was  declines in maple syrup related to its earlier decision to discontinue private label business, higher marketing spend as well as higher freight costs (many companies are noting this) and negative mix effect. In addition, 2 key retailers delayed shipment causing $4-$7MM of sales to be deferred.

On the other hand, Green Giant frozen (which you may have seen in your grocery store recently with launches such as riced cauliflower, vegetable based tots, and roasted steam-able corn), grew 23% Y/Y making it the second fastest-growing brand in the frozen foods category. That isn’t to say that this specialized market hasn’t had it’s share of competition (e.g. Bird’s Eye). It also saw double digit growth in Pirate’s Brands from distribution winds and mid-single digit growth in Bear Creek sales.

Net/net, a disappointing quarter which helped the bear thesis that the mature brands of B&G will be stagnant to declining over time. On the other hand, the stock is at lows not seen since 2014 and the company has hired a new COO to oversee the company’s growth strategy and implement a new productivity program for the company.

Let’s walk through management’s guidance for 2018 and determine if we should double down or bounce out. 

BGS FCF walk 2018

The center column is the company’s current guidance of $355MM of EBITDA at midpoint and its estimates of capex, interest, taxes for 2018. I’ve done a sensitivity analysis to say, how well are we protected if the company severely misses its own guidance. Note, I did make one assumption here that if the company’s starting to see that it will come in below its guidance, capex will be at the low end of the $50-55MM range it provided and did the opposite if it comes in at the higher end. However, this is a minor assumption in the grand scheme of things.

In the base case of the company hitting its guidance, the stock is trading at a 10% FCF yield, which is well above the 3-5% yields from most companies in the S&P500. We can also see, even in the case where EBITDA is 20% lower than mgmt’s expectations, the $127MM of FCF covers the $125MM of dividend payments currently paid by the company. I’d like there to be more coverage, but we are assuming a pretty meaningful downside here.

In sum, I think its worth sticking around at this point. The downside already seems to be priced in and I think B&G, while it faces some headwinds, should be able to recover as it laps them in 2018. It will be some difficult comps over the next 4Qs, but with a 7.2% dividend yield and 10% FCF yield, I think there is significant cushion here to protect our downside further. If the stock just trades at a 6% FCF yield, it implies a $44 stock price, or 70% upside from today’s levels.


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