The Aisle of Misfit Brands
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
B&G Foods (NYSE: BGS) is one of those stocks that won't capture anyone's attention at a holiday party, though likely some of their products were used to make the feast. But let it drop that BGS has had a double since you bought it and now your yield is at 10% (assuming you bought in 2010) and their necks will whip around. "Is it a biotech? Is it an Apple supplier?," they'll breathlessly ask. "Is it a railroad? An investment bank?" You could keep them guessing indefinitely as they'd never dream that it's a food company, one that specializes in taking over unloved and unwanted brands, and giving them an extreme makeover.
Who would ever guess that a company with brands like Cream of Wheat and B&M Baked Beans (among 24 others) and of course, B&G pickles could perform so well? When I read the list of brands I was surprised to find some I thought had gone out of business long ago like Vermont Maid Syrup and Ac'cent. The company also has some well-known newer brands like Emeril's, Ortega Mexican food, and Polaner spreads.
B&G Has BIG Competition
Since B&G has so many brands, it has a lot of competitors, including The J.M. Smucker Co. (NYSE: SJM) better known as Smucker's and Pepsico (NYSE: PEP). Smucker's competes on the jams and jellies. Smucker's has a market cap of $9.25 billion and has a lower P/E of 19.58 but a smaller yield of 2.50% compared to B&G's 4.10%. Smucker's just reported on Nov. 16 and beat on revenues and met expectations on earnings which were up 17% year over year. The name is up 13% over 52 weeks.
Pepsi also competes against B&G's Cream of Wheat with their Quaker hot oatmeal brands. Pepsi has a market cap almost 100 times the size of B&G, 106.04 billion to 1.51 billion. Pepsi has a lower yield at 3.10% but the P/E is lower, too at 18.26. Pepsi is up 8.17% over the last year.
General Mills (NYSE: GIS) is also considered a competitor with its Old El Paso brands competing against B&G's Ortega brand. General Mills has a market cap of $26.09 billion but this company's stock may be the most attractive compared to B&G with a 3.30% yield and a 15.89 P/E. However, General Mills is barely up 4% over 52 weeks and B&G is up 31%.
Even Procter & Gamble (NYSE: PG) is a competitor as B&G has some fabric care brands like Static Guard. With B&G's acquisition of Culver Specialty Brands from Unilever in 2011, B&G will also compete against Procter & Gamble in hair care and body care products. Procter & Gamble is the biggest of all these companies with a market cap of $185.35 billion and a yield of 3.40%. The P/E is 18.88 and the company seems to be back in favor as a defensive consumer staple. P&G has moved slightly higher than General Mills this last year up 8.37%.
How Do They Do It?
How does a company with only 740 employees compete against these titans of food and household care? Naturally, labor costs are low. All corporate governance risks are low including compensation so management is not lining their pockets. Then they distribute the products through a network of independent brokers and distributors.
The strategy of buying new brands is targeted at companies doing under $100 million in sales so there are fewer interested buyers. They get these companies for a song. Also, they only buy shelf stable brands so freshness is not a worry. All new brands are considered in light of brands already under the umbrella to see if they are complementary. And finally, the brands they buy are immediately accretive.
A good example is their purchase of Cream of Wheat in 2007. They immediately updated the packaging, added new flavors like Cinnabon variety (and recently chocolate) and then promoted the heck out of it with coupons, social media, and print and television advertising.
Can They Keep It Up?
The company explained how they plan to continue executing at the Barclays Back to School Consumer Conference in September that their superior margin structure allows for significant free cash flow. Also, they added that a three tier brand management focuses more on higher margin possibilities. This is in effect a reverse triage in which brands most likely to thrive are given the most support and promotion.
Their commodity costs are fixed through the second quarter of 2013 and some are fixed through Q4 of 2013. In addition, they are working through their plan to cut operating costs by 4%, saving $8.5 million in 2011 and $6.5 million as of June.
The big question is can they sustain the dividend which they regularly raise and is currently at an 81% payout ratio. They have almost $700 million in debt to $15 million in total cash. However, this debt is in three tranches with a quarter due in 2016 and the rest in 2018. Standard & Poor's just raised B&G's rating to B on Nov. 8 with a corporate credit rating of B+.
The company is committed to maintaining the dividend as CEO David Wenner has mentioned in many public forums. It's also committed to growth and is eyeing a purchase of Skippy peanut butter from Unilever. This would be an obvious synergy with their Polaner brand jams and jellies.
Should You Pick Up This Pickle Company?
B&G Foods is not the value and growth secret it was a year ago. At this years' holiday parties some may be bragging of the money they've made on this pickle (and so much more) company. As they nibble on B&G products some will ask can you still buy it here? Their business model is intriguing and quite successful. This is still a stable and growing company with a low beta of .78 and a bright future. Think about buying a taste and see how it spices up your portfolio.
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