Friday, July 29, 2011

Food Defense

Although I thought my appeal in the last post on deficit spending would register a strong appeal with members of Congress, it appears my call has gone unheaded to “follow the economic arrows.”  Members of Congress and the Administration seemed more interested in political games than in rising in solving real economic and fiscal problems.  The debt ceiling limit is looming larger than ever over our heads.

It is time for investors to get defensive.  Short of hiding money in a mattress, the best investment in tough times is food.  B and G Foods, Inc. (BGS:  NYSE) was profiled in our Small Cap SEARCH newsletter a few issues back. 

B and G Foods, Inc. is a leading manufacturer and distributor of shelf-stable foods in the U.S., Canada and Puerto Rico.  Its products are sold under popular brand names including Ortega,  Cream of Wheat, Polaner, Las Palmas, B and M, Ac’cent, Emeril’s and Brer Rabbit, among others.  Food choices include Mexican cuisine, fruit-based spreads, jarred wet spices, baked beans and brown bread, meat spreads, pasta sauces, flavor enhancers, molasses products, vinegars, cooking wines, sauces, marinades and soups.  Its portfolio of brands and foods has been assembled in part through a series of acquisitions over the past fourteen years.  The Company’s most recent acquisition was the Don Pepino and Sclafani brands from Violet Packing, Inc.  It was the first deal in four years and is expected to help drive sales and earnings over the next few years.  We expect the Company to continue pursuing tuck in acquisitions of strong brands that complement the Company’s portfolio of specialized foods and unique flavors.

Despite the economic downturn, B&G has been successful in growing sales and profits in each of the last three years.  The Company reported $513.3 million in total revenue in 2010, providing $98.9 million in net income or $0.68 per share.  This represents a net margin of 6.3%, which compares favorably with the net margin of 3.5% in previous year.    Operations generated $98.9 million in cash, implying a cash conversion rate of 19.3%.

Ample profits have fortified the balance sheet.  The Company held $98.7 million in cash and equivalents at the end of December 2010.  Working capital totaled $153.9 million.  B&G holds $477.7 million in debt, most of which was accumulated in support of its acquisition strategy.   We note that the Company’s dividend of $0.84 per year appears secure given the Company’s cash balances and consistent cash flow generation. 

Analysts following the Company expect strong growth in the coming year.  The consensus earnings estimate for 2011 is $1.02 per share on $536.3 million in total sales.  The anticipated growth is expected to be driven in part by the Company’s recent acquisition of the Don Pepino and Sclafani brands.  Margin pressure from inflationary influences in product ingredients may be a factor in 2011 and 2012.  However, it appears analysts have minimized the threat.

When we first profiled BGS in the Small Cap SEARCH Newsletter, we set our price target at $23.00.  The price target implies a multiple of 20.0 times the 2011 consensus estimate.  This is dramatically higher than the consensus target price of $17.92.  At the time we thought the consensus target price does not adequately credit the Company for its building profitability and top-line growth.  That target price might be a bit aggressive given recent economic developments.  Nonetheless, the stock still seems undervalued.

In our view, the Company should trade near the average price-earnings multiple of the S&P 500.  We expect positive year-over-year comparisons throughout 2011 to attract investor interest.  We suggest investors accumulate BGS during periods of price weakness so maximize potential dividend yield.  The stock yields 4.8% at the current price level.  We expect the stock to trade as high as $23.00, but suggest investors accumulate shares up to the $20.00 price level and only begin buying aggressively below $17.50 per share.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. BGS was profiled in the Small Cap SEARCH Newsletter in April 2011 with a generally favorable view.

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