Panning for Solid Gold Pantry Stocks

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Using a stock screener is a lot like panning for gold. After screening over 4,000 food and beverage stocks on criteria of a minimum four star CAPS rating, yield over 2.5%, and Wall Street outperforms, three names come up shining: Cal-Maine Foods (NASDAQ: CALM), B&G Foods (NYSE: BGS) and Pinnacle Foods (NYSE: PF). I was fully expecting to see names like General Mills or McCormick.

Defensives have run like rabbits as investors seek protection from a market correction. Maybe with extended P/Es after so much market love that's why big caps PepsiCo, Campbell Soup Company, Kellogg, and J.M. Smucker didn't make the screen.

Panning for Pinnacle

The three that came through are small to mid-caps with B&G Foods a direct rival to Pinnacle Foods. Pinnacle only debuted on March 28 to much fanfare for a canned and frozen food stock. You're probably familiar with its products, found in 85% of US households. Their leadership brands are Mrs. Butterworth's syrup, Vlasic pickles, Duncan Hines, and Aunt Jemima.

Pinnacle's trailing P/E is a pricey 41.74 and the forward P/E is 15.34. This one may only be gold plated as that P/E shouldn't have made it through the screen. Also, the stock has run 15% since its IPO when it opened at $22.15.

However, as promised, the company plans to pay a dividend with a 3% yield with some of the IPO proceeds as well as paying down debt. And it has a lot of debt, $1.8 billion remaining after the $580 million proceeds when Blackstone took them public. Blackstone still owns 70% of the common stock.

Analysts expect 8.50% revenue growth for the next year with 2013 revenues of $2.45 billion and $2.52 billion in 2014. Stifel Nicolaus initiated coverage with a Buy on May 6. The median price target is $27.00 which doesn't leave much room for upside having closed at $25.46 on May 17. Trading at 1.15 price/sales, Pinnacle is lower than the industry's 1.74 and with a1.39 PEG, compared to General Mills at 2.41, it's not a terrible value but that debt load is hard to swallow.

The company has grown in the past by acquisition, acquiring Birds Eye Frozen Foods and Armour canned meats. Its targets are usually unloved underperformers which it then gives a makeover and some marketing support.

Feisty and growing

That model is identical to B&G Foods, a better stock in my opinion, with a 3.80% yield and a five star CAPS rating. It has built an impressive roster of brands, just on May 7 acquiring True North nut snacks from DeMet's for an undisclosed sum. Other brands you likely have in your pantry are their Ortega tacos and salsas or some of its other 30 brands like Polaner spreads and Cream of Wheat.

It's beginning to extend into personal care having acquired Culver Specialty brands (hair and body care) from Unilever and so will have another big cap rival, Procter & Gamble, besides other big cap food conglomerates like Mondelez International, J.M. Smucker, and PepsiCo for its food division.

Their model, like Pinnacle Foods, is to take downtrodden food companies, under $100 million, and spiff them up and promote them heavily. Case in point is Cream of Wheat which they bought and added Cinnabon and chocolate varieties and promoted with coupons and social media. Also, brands they acquire are shelf-stable (an advantage over Pinnacle Foods) and expected to be immediately accretive or no sale.

The Parsippany, NJ company, suffered from last fall's Hurricane Sandy sending Q4 sales volume down by half as some of its biggest markets are in New York and New Jersey. The headquarters itself was without power for nine days but still reported full year 2012 net sales of $633.8 million.

This feisty little company has less than 1,000 employees and is committed to keeping costs down having saved $15 million in 2011-12. Commodity costs are hedged through July. B&G Foods reported Q1 results on April 18 of an increase of 8.8% in net sales at $171.2 million and 17% in net income. EBITDA increased 7% to $45.7 million. The company increased full year EBITDA guidance to $180-184 million.

Since 2009 the company has raised its quarterly dividend from $0.17 per share to $0.29 per share and CEO David Wenner has publicly affirmed the company's commitment to raise the yield on a regular basis. Corporate governance risk rating is a low (very good) 2. This is just a solid business with a lean workforce, smart acquisition strategy, and shareholder-friendly.

The "Incredible, edible egg" business

Cal-Maine Foods is the largest producer/distributor of shell eggs in the US. This is the best bargain of the three at an 11.68 trailing P/E and a 3.90% yield.

The egg business is always somewhat commodity dependent so that is a risk. CEO Adolphus Baker noted feed costs were up 22% in Q3 and expected to stay high this summer, but the short interest has been decreasing and is now at 7.2%. This company has major insider conviction with its Chairman Emeritus Fred Adams Jr. holding 1,795,399 shares and Baker holding 204,242 shares.

Cal-Maine controls almost 20% of the US fresh egg market in the US. The company reported Q3 and prior nine months results on April 1 of a 19% rise in Q3 net sales compared to the prior year quarter and net income up close to 15%.

Of interest, specialty eggs sales (organic, cage-free, etc.) rose 20% This healthy eating trend has been apparent across numerous food stocks this year. CEO Baker commented on the earnings call, "We believe the performance of specialty eggs will be a key driver of our future growth."

Fellow Fool Jacob Roche believes the egg business is zero growth but Cal-Maine's lone analyst expects 17.70% growth next year. I agree with the analyst as consumers will eat more eggs as beef, pork, and lamb prices soar.

With little analyst coverage, high yield, and increasing demand this company may be the chicken that lays the golden egg for your portfolio.

Appraising these gems

I think both B&G Foods and Cal-Maine are solid gold through and through with high yields and solid earnings reports. Until Pinnacle Foods reports for the first time I think it's just gold plate and not worth your money.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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