B&G Foods: Rough Times Again

In September of last year, I last looked at B&G Foods (BGS) in an article named: ''A sale, for once.'. The company sold its Pirate business to Hershey (HSY) at a multiple at which I have been impressed, allowing the company to reduce leverage. I approved the more cautious route of management, yet found that B&G was still very leveraged amidst a high payout ratio.

The $420 million in gross proceeds received in connection to the deal are now being put to use (partially) to not just please investors with continued and non-sustainable dividends, yet with another acquisition as well. I was impressed with the sale not just because it was a sale, but because the company made more than twice its money in the period of just about 5 years, after it bought the company back in 2013 at $195 million.

The Old Thesis

Upon the sale of the Pirate business, I noted that net debt would fall to $1.59 billion as the company guided for adjusted EBITDA of $350 million. Including some deleveraging following the divestment, I expect that leverage would come down to about 4.8 times.

The company guided for 2018 earnings to come in at around $2.10 per share (of course adjusted earnings). With dividends running at $1.90 a year, the payout ratio is already equal to 90%, not leaving much room for deleveraging. This is especially the case as these are adjusted earnings as well, with some real cash costs excluded in the earnings number. All these factors made that I have been very cautious on the shares and by no means was compelled to buy a mid single-digit earnings multiple at around $30 per share in September, as I have been long term very cautious on the shares.

The caution has served me well as base sales growth of 0.9% for 2018 was anything but impressive, and much needed given the ambitions of the company to grow the business and pay out very steep dividends. The outlook provided halfway 2018 proved to be far too optimistic with adjusted earnings actually coming in at $1.85 per share with adjusted EBITDA down 6% to $314 million as net debt stood at $1.62 billion at the end of the year, making that leverage ratios have risen to about 5.1 times again amidst lower earnings power.

The outlook for 2019 was not very impressive either with sales seen at $1.65 billion at the midpoint of the guidance, EBITDA at around $305-$320 million and adjusted earnings per share seen around $1.85-$2.00 per share.

The first quarter trends were not very convincing either, as the company is actually in the process of buying shares instead of the continued issuance of shares. I like the timing of these repurchases, that of buying back shares at (optically) lower levels; reality is that this is pushing up leverage ratios as well. Despite the somewhat higher than expected sales for the first quarter, margins were soft again, as the company is reiterating the full year guidance. With net debt stable at $1.62 billion, leverage ratios remain elevated at 5 times.

What Now?

With 65 million shares outstanding having fallen to $22, the equity valuation of the company amounts to $1.43 billion. Including net debt of $1.62 billion, the enterprise valuation comes in at $3.05 billion, about 10 times EBITDA and about 1.8-1.9 times sales.

This is important as management has hit the buy button again, despite shares falling to levels in the low-20s again. Halfway May B&G announced another acquisition, that of Clabber Girl Corporation, a producer of baking products.

The $80 million price tag looks really fair with the business expected to contribute $70-$75 million in annual sales, although no margin details have been announced. This makes that net debt jumps to $1.70 billion. With stand-alone EBITDA of $315 million perhaps getting a boost of around $10 million, or a few million more, I see leverage ratios fairly stable at around 5.2 times.

Reiterating My Caution

While shares of B&G trade at very fair multiples of 12 times earnings, one has to recognise that these are adjusted earnings with quite some adjustments as leverage is sky-high and base sales are flat. Even as I recognise that multiples and expectations are not very high at all, I am not inclined to buy the dip just yet as the entire sector is on sale currently, with more stronger brand and less leveraged businesses being on sale at perhaps similar earnings multiples.

I continue to be cautious although I must say that I like the latest move (from a sales multiple point of view) as we arguably do not know the margin profile of the acquired business just yet. B&G has paid out incredible dividends and has done this for quite a while now, but it is evident that this situation is not sustainable and in the long term needs to be addressed by sales activities, issuance of shares or cut in the dividend.

For now, I can only reiterate my caution, although stability and/or growth could easily turn current levels into a great long-term buying opportunity. That being said, I remain sceptical about the strategy of elevated leverage in combination with high dividends. While share repurchases which are currently executed could be very accretive, financial turmoil might be in the works as well if trends in the consumer goods business continue to be dismal, let alone worsen.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.