{"id":5967,"date":"2023-10-27T12:57:39","date_gmt":"2023-10-27T12:57:39","guid":{"rendered":"https:\/\/infundpros.com\/news\/bg-foods-a-classic-value-trap-nysebgs\/"},"modified":"2023-10-27T12:57:40","modified_gmt":"2023-10-27T12:57:40","slug":"bg-foods-a-classic-value-trap-nysebgs","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=5967","title":{"rendered":"B&G Foods: A Classic Value Trap (NYSE:BGS)"},"content":{"rendered":"
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B&G Foods (NYSE:BGS<\/span>) produces and sells food products under a numerous amount of brands and categories. The stock has been on a decline in the long term as well as short term as the company\u2019s organic performance has been very poor \u2013 to fuel B&G Foods\u2019 growth, the company has had a spree of acquisitions. Although the stock seems cheap with a forward P\/E, I believe that the stock is still overvalued; I have a sell-rating for B&G Foods.<\/span><\/p>\n

The Company & Stock<\/h2>\n

B&G Foods manufactures a large amount of different food products. The company\u2019s food product categories include baking, dressings, meal solutions, sauces, seasonings, snacks, soups, and syrups among other categories. The company owns a wide portfolio of brands, totalling up to more than fifty brands. B&G Foods\u2019 brands include names such as Clabber Girl, Cream of Wheat, Crisco, Cinnamon Toast Crunch, Devonsheer, Maple Grove Farms, and Old London.<\/p>\n

As most of B&G Foods’ portfolio relies on around basic food products, the company isn\u2019t very exposed to macroeconomic risks \u2013 food is a basic necessity, so demand around products such as meal solutions, sauces, and soups stays very stable. In the current economy, I believe that a non-volatile offering in terms of the macroeconomic could prove to be valuable.<\/p>\n

B&G Foods\u2019 stock price has plummeted in the past ten years, losing three quarters of the stock\u2019s value in the period:<\/p>\n

\"stock<\/span>
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Ten-Year Stock Chart (Seeking Alpha)<\/span><\/p>\n<\/figcaption><\/figure>\n

The company\u2019s investors have relied on a significant dividend. Currently, the company\u2019s estimated forward dividend yield stands at 9.08% after the dividend was significantly cut in late 2022 from a quarterly dividend of $0.48 to a quarterly dividend of $0.19.<\/p>\n

Financials<\/p>\n

At first glance, B&G Foods\u2019 historical growth has been excellent \u2013 from 2002 to 2022, the company has achieved a compounded annual growth rate of 10.5%, leaving investors wondering why the stock price has been on a slow downfall:<\/p>\n

\"bg<\/span>
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Author’s Calculation Using TIKR Data<\/span><\/p>\n<\/figcaption><\/figure>\n

The disconnect between B&G Foods\u2019 revenue growth and stock price is a result of the source of the growth: it seems that the company\u2019s growth has been achieved only through extensive acquisitions. From 2002 to 2022, B&G Foods\u2019 accumulated acquisitions add up to an amount of $3.3 billion \u2013 compared to the company\u2019s current market capitalization of $0.6 billion and EV of $2.9 billion, the acquisitions seem to have only deteriorated in value.<\/p>\n

\"bg<\/span>
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Author’s Calculation Using TIKR Data<\/span><\/p>\n<\/figcaption><\/figure>\n

After the peak in 2012, B&G Foods\u2019 EBIT margin has mostly been falling. From 2002 to 2022, the company\u2019s average margin is 17.0%, with the current trailing margin only standing at 11.0%. The margin is on a slight upward trend in 2023 so far, as in 2022 the achieved margin was 9.4%. In 2022, the margin seemed to be tighter due to cost inflation; I believe that the current level is more representative of a sustainable margin in the medium-term.<\/p>\n

\"bg<\/span>
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Author’s Calculation Using TIKR Data<\/span><\/p>\n<\/figcaption><\/figure>\n

To finance the constant acquisitions, B&G Foods has had to draw an immense amount of debt. Currently, B&G Foods has long-term debts totalling over $2.2 billion on the company\u2019s balance sheet. Compared to the market capitalization of $0.6 billion, the amount seems very excessive. In the last twelve months, interest expenses have been around 62% of B&G Foods\u2019 EBIT.<\/p>\n

Valuation<\/h2>\n

From the stock\u2019s forward P\/E ratio, it seems that the clearly poor organic performance is priced into the stock, as the current forward P\/E stands at 8.8, significantly below the ten-year average of 15.5:<\/p>\n

\"price<\/span>
\n

Historical Forward P\/E (TIKR)<\/span><\/p>\n<\/figcaption><\/figure>\n

As B&G Foods\u2019 EBIT margin history and organic growth has been poor, the cheap P\/E ratio can be a deadly trap for investors. To further analyse the valuation and to get a rough estimate for a fair value, I constructed a discounted cash flow model as usual. In the model, I estimate B&G Foods\u2019 revenues to fall by 2% in the current year, along the company\u2019s guidance. After 2023, I estimate a slight growth of 2% as inflation is still partly heightened. After the year, I estimate a nominal growth of 0% – the company\u2019s organic performance has been very poor historically, and I don\u2019t see any catalysts for a better performance in the future.<\/p>\n

As for the company\u2019s EBIT margin, I estimate the margin to stay at the current trailing level of 10.4% for 2023. After 2023, I estimate some more margin expansion as a result of a possibly better economy. Yet, the company\u2019s long-term margin history has been poor – I estimate B&G Foods\u2019 EBIT margin to start falling slightly in 2025 and beyond into a perpetual EBIT margin of 9.7%. The company has a mostly good cash flow conversion as a result of a large amount of depreciation in B&G Foods\u2019 accounting earnings.<\/p>\n

The mentioned estimates along with a cost of capital of 6.75% craft the following DCF model with a fair value estimate of $5.60, around 33% below the price at the time of writing:<\/p>\n

\"discounted<\/span>
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DCF Model (Author’s Calculation)<\/span><\/p>\n<\/figcaption><\/figure>\n

The used weighed average cost of capital is derived from a capital asset pricing model:<\/p>\n

\"cost <\/picture>
\n

CAPM (Author’s Calculation)<\/span><\/p>\n<\/figcaption><\/figure>\n

B&G Foods had around $36 million in interest expenses. With the company\u2019s current interest-bearing debt balance, the company\u2019s current interest rate comes up to an annualized figure of 6.38%. The company utilizes a very high amount of debt and seems to have done so for a long period of time \u2013 I estimate a very high long-term debt-to-equity ratio of 50% for the company.<\/p>\n

On the cost of equity side, I use the United States\u2019 10-year bond yield of 4.96% as the risk-free rate. The equity risk premium of 5.91% is Professor Aswath Damodaran\u2019s latest estimate made in July for the United States. Yahoo Finance estimates B&G Foods\u2019 beta at a figure of 0.55. Finally, I add a small liquidity premium of 0.5% into the cost of equity, crafting the figure at 8.71% and the WACC at an astonishingly low 6.75% – investors shouldn\u2019t expect a large return from the stock, but not a ton of risk either.<\/p>\n

Takeaway<\/h2>\n

B&G Foods checks multiple signs of a value trap. The company has a seemingly low P\/E ratio with a stable product. The company has achieved some growth in the company\u2019s history, but under the surface, the achieved growth is hiding a very poor organic performance. The company also has a very significant amount of debt, leveraging potential risks for investors. At the current price, my DCF model also estimates the stock to be overvalued \u2013 for the time being, I have a sell-rating.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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