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B&G Foods: Value Stock or Value Trap?

Value stock investing is a term heard quite often in the world of investing. Many people believe value investors simply look for cheap stock, such as those with a very low price-earnings ratio.

Stocks trading with a low valuation can often mean that the company has headwinds in its business, especially in an extended bull market. Stocks are often cheap for a reason, so value investors have to be confident that the underlying company will be able to overcome obstacles. If the company is able to do so, then shares can see an expansion in the price-earnings ratio as price comes in line with intrinsic value.


However, companies that are not able to counter headwinds and continue to see a decline in the business will likely experience even further multiple compression. These types of stocks are considered to be value traps. Value traps are those investments that trade with a low price-earnings ratio because no material improvement has been made within a struggling company.

One interesting stock trading with a low valuation is B&G Foods, Inc (NYSE:BGS). In this article, we will examine whether B&G Foods is a solid purchase or a value trap.

Company background and recent results

B&G Foods is a well-known consumer staple company that operates in the U.S., Canada and Puerto Rico. It offers brands such as Green Giant, Cream of Wheat, Ortega, Cary's, Don Pepino and Maple Grove Farms. B&G Foods focuses on shelf-stable, frozen and snack foods. The company has used acquisitions to fuel growth, having purchased 29 brands since 1997. The stock has a market capitalization of $1.1 billion today.

B&G Foods reported fourth quarter and full year 2019 earnings results on Feb. 25, 2020. Revenue increased 2.7% to $470 million, which was slightly above estimates. Adjusted EPS of $0.28 was in line with estimates but marked a 17.6% decline from the previous year. For the year, revenue decreased 2.4% to $1.66 billion, while adjusted EPS was higher by 3.7% to $1.70.

The company's acquisition of Clabber Girl was the main driver of revenue growth in the fourth quarter, though this was partially offset by the Pirate Brands divestiture. Clabber Girl added $25.2 million to quarterly sales and $53.6 million to annual sales. Base business decreased 2% as price increases only partially offset a decline in unit volume.

While nearly every product category saw a decline in sales in the fourth quarter, most were higher for the year. Green Giant, Maple Grove Farms and New York Style had sales growth of 1.5%, 3.7% and 5.7%, respectively, in 2019. On the other hand, Cream of Wheat was lower by 4.2% and Ortega declined 0.6% for the year.

On the positive side, selling, general and administrative expenses declined $3.1 million, or 6.5%, in the fourth quarter. SG&A expenses represented just 9.5% of sales, an improvement of 90 bps from the previous year. SG&A expenses improved 4% for the year.

B&G Foods expects adjusted EPS in a range of $1.60 to $1.80 for 2020 on revenue of $1.66 billion to $1.68 billion. The company has compounded EPS by more than 6% over the last decade. Much of this growth occurred during the years following the last recession as the company used debt to finance acquisitions.

Consumer tastes have changed rapidly over the past few years and many now avoid products located in the center of the grocery store, where B&G Foods has most of its products. This has impacted results for B&G Foods as EPS has declined over the past two years. Given these factors, we forecast that B&G Foods can grow EPS at a rate of 2% over the next five years as a best-case scenario.

Dividend analysis and total returns

B&G Foods currently offers a dividend yield of 11.8%. Double-digit yields often point to signs of trouble for a company, and this is true for B&G Foods. The company is expected to pay out $1.90 in dividends per share this year. Using the midpoint of the company's EPS guidance for 2020, B&G Foods is expected to have a payout ratio of 112%. This means that B&G Foods expects to pay out more in dividends than it earns in underlying profit.

Companies cannot have a payout ratio in excess of 100% for long without issuing more shares, taking on debt or cutting the dividend. B&G Foods maintains its stance of not issuing stock at any price that is more 37% below its 52-week high, so diluting the share count likely isn't an option.

We should note that B&G Foods has had an EPS payout ratio near or above 100% several times since 2014, so this isn't an unusual situation for the company. If EPS growth doesn't return, then the company could reduce its dividend.

The company's balance sheet is far from ideal as well. B&G Foods has used debt to help fund acquisitions over the past few years. The company has $1.8 billion in long-term debt as of the most recent quarter. This means that the company's debt-to-capitalization ratio is 1.63. Net interest expenses grew more than 13% to $3.2 million in the fourth quarter and 9.4% $10.2 million for 2019 due to an increase in average long-term debt outstanding. This means that adding to debt obligations probably isn't a good idea for B&G Foods.

Final thoughts

Value investors often look to stocks with a low price-earnings ratio. Their goal is to find stocks that the market has undervalued. However, this often means that the companies behind these stocks are experiencing some difficulty. Thus, some stocks that appear to be value plays turn out to be value traps, meaning that the company isn't able to overcome the headwinds that it faces and is not worth even the lowered valuation.

B&G Foods seems to fit the description of a value trap, in my view. The company certainly has headwinds, including a low growth rate and issues keeping up with consumer tastes. The company has managed to grow in the past through acquisitions, but given the amount of debt that it holds, this seems like a difficult practice to continue in the future.

B&G Foods also has a very high dividend yield, but this yield makes up the majority of our projected annual returns over the next five years. If the dividend were to experience a cut, then investors holding the name for its dividend would see a drastic reduction in income.

Therefore, B&G Foods receives a hold recommendation from Sure Dividend. We feel that the stock is more of a value trap than a value buy at this point.

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This article first appeared on GuruFocus.


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