Bridgford Foods: Collapse Defies Logic

Nov. 4.08 | About: Bridgford Foods (BRID)

I admit, I have repeatedly promoted the merits of owning Bridgford Food (NASDAQ:BRID) shares, and my constant rantings have probably sounded like a broken record. The story so far has not had a happy ending. The truth is, owning shares of BRID has been more of a nightmare than anything else, but there appears to be some light at the end of the proverbial tunnel. The stock price plummeted to a new 20 year low on Friday, dropping 10% to $4.26, on volume of 4200 shares. Surprisingly, a mere $19,000 worth of shares changing hands prompted a  disproportionate market cap loss of $4 million  (200 times greater than the value of shares traded).

At its current market capitalization of $40 million, and a enterprise value of $34 million (EV= adding cash to market cap, subtracting debt), the valuation is absurd and downright bordering on lunacy. Wall Street appears to have thrown the baby out with the bath water on this one, with the mentality of "sell now and ask questions later" dominating the insanity. The market appears oblivious to the fact this company has been in business over 70 years, has zero debt and provides a vital product necessary to sustain life, food.

A dozen years of history: The company has had an impressive record over the last twelve years, recording a profit in ten of the last twelve years. It has generated sales of $1.64 billion and earnings of $48 million. It has returned about $34 million back to its shareholders through $19 million of cash dividends and $15 million worth of stock buy backs. It has always produced positive cash flow despite reporting a $943,000 loss in 2005, and a $29,000 loss in 2007. The company has never needed to utilize its bank revolving credit line. At the top of its game, BRID sported a share price as high as $25.

Property Plant and Equipment: BRID, in its history, has essentially acquired $66 million of capital assets,and through accumulated depreciation of $55 million, written those assets down to their current entry of $11 million. With an average annual depreciation of $3 million and yearly capital expenditures of about $1.5 million (each year an additional $1.5 million ends up being deducted from this category) the company will be unable to depreciate assets in seven years, as the current property, plant, and equipment entry will be cancelled out by then, at the current run rate. The lack of depreciation expense will then fall directly to the bottom line.

Assets are undervalued: What does a company need to produce $135 million worth of meat, bread, and snack foods per annum? It needs a heck of a lot of infrastructure. The snack food purveyor has it, owning seven processing plants and its corporate headquarters facility. Its total real estate holdings encompass 285,000 square feet of manufacturing and office space on 23 acres. It retains over 400 delivery route trucks. It owns the conveyor belts, the ovens, refrigeration units and the packaging and processing equipment necessary to be a successful food processor. The fact is, you couldn't even erect one single new plant with the $11 million BRID currently shows on it balance sheet under this asset entry.

Low float and high short interest: The Bridgford Family owns 7.7 million shares of 9.4 million shares, or 82% of the outstanding shares. This fact leaves a very low float of 1.7 million shares available to trade. BRID's short interest ratio of 36 is extremely high, meaning it would take 36 trading days of average trading volume for all the short positions to be eventually covered. This phenomenon sets up the possibility of a tremendous short squeeze to develop, as this potential buying power would have few shares available for purchase.

Outlook: Fourth quarter earnings are set to be released in January, and are expected to be lackluster at best. The recent sell off in commodity prices, such as the drastic drops in fuel, meat, and grains came too late to rescue 4th quarter performance, but should bode well for first quarter results. Management is optimistic that fiscal year 2008 will show marked improvement due to lower input costs, modest sales gains and successful cost cutting endeavors. There is ample opportunity for vast improvement.

The company has averaged a gross profit margin of 36%, with Selling, General & Administrative costs at 33% of sales, for the past three years. If BRID could just improve 100 basis points in each of these segments, the company could produce an additional $2.7 million of earnings. I recently had the honor of speaking with upper management about the condition of their share price. Their take: one of complete and utter astonishment. Their action: to take advantage of its compelling value by aggressively repurchasing as many shares as its stock buy back program allows.

Bottom line: This is, by far, the most undervalued situation I have ever encountered in my long career as a stock speculator. The shares are undeniably selling at less than one half of liquidation value. I anticipate the market will eventually get its act together, sort through the facts, and price the company accordingly. The cream eventually rises to the top, and BRID will be no exception. There is absolutely no reason why this stock cannot triple within the next three years, you just have to have the patience at this point.

Disclosure: Long BRID.