At the Bank of America - Merrill Lynch Leveraged Finance Conference earlier this month, B & G Foods (BGS) executives presented an updated view of the company's acquisition philosophy, revenue performance and leverage ratios. David Wenner, CEO, and Bob Cantwell, CFO both participated. For those unfamiliar with B&G, the company manufactures and distributes a variety of well-known, shelf stable food products in the US and Canada. It has grown through a series of accretive acquisitions and used those acquisitions and the incremental free cash flow they generate to grow the dividend.
On Thursday, the shares of B%G rose $1.06 (3.7%) to $29.53 after it was upgraded by RBC Capital from Sector Perform to Sector Outperform. The analysts tracked by Yahoo! Finance show 6 analysts all rating the company as a hold (RBC's change has not been updated). Schwab's research rates the company "C" (essentially a hold) and shows that Ned Davis Research rates it Sell and Market Edge rates it Avoid.
B&G doesn't appear to draw much interest or get much respect from the analysts. At the BofA-ML Conference, following the company presentation, no one asked any questions. In fact, even the upgrade by RBC only has a $32 price target. That's below the 52 week high of $32.84 reached September 21st. Not one of the analysts has a price target above that September high.
And, it's not as though the institutional investors are rushing to add B&G to their holdings. The NASDAQ web site shows the institutional ownership at just under 56%. Compare that to other companies that have products that B&G competes with: J. M. Smucker (SJM) institutional ownership is at 73.6%, General Mills (GIS) is at 69.9%, Kellogg (K) is at 77.8% and Pepsi (PEP) is at 68.5%.
The company has executed very well in the past several years. It has been able to grow revenue and earnings through accretive acquisitions - acquisitions that had been typically financed by debt. As a result of these acquisitions, it has been able to increase the dividend four times since the end of 2010. The new dividend of $1.16 per share is 70% higher than the $0.68 paid out in 2010 and now yields just over 3.9%. (It should be noted that the dividend had been cut from $0.85 to $0.68 in late 2008 during the midst of the financial crisis.)
Many retail investors could be attracted to B&G because of that dividend. It compares very favorably to its competitors: the J. M. Smucker dividend yield is 2.4%, General Mills is 3.2%, Kellogg is 3.1% and Pepsi is 3.1%.
At the BofA-ML Conference CEO David Wenner discussed 2012 revenue performance. He noted that the company groups its products into three tiers, where Tier I brands account for 48% of company revenue while Tier II and Tier III account for 31% and 21%, respectively. The product tiers are reflective of the brand growth potential and higher development and marketing efforts and expenditures. Tier I is the highest tier.
As noted above, B&G has grown revenue largely through acquisitions. Also helping this year were price increases instituted in the Fall of 2011 and earlier this year. The lukewarm support for B&G by the analysts may be reflective of the tepid pro forma growth so far in 2012. Year to date, Tier I brands have grown 2.0% compared to 4.8% in 2011, Tier II brands have not grown at all this year compared to 9.8% growth in 2011 and Tier III brands showed a sales decline of 3.5% compared to 1.5% growth last year. The Tier III decline was attributed to the company's decision to exit certain private label sales.
The investor should not confuse these pro forma growth percentages with the overall growth in B&G revenue. Total revenue for YTD 2012 is running 16.8% ahead of 2011. 2011 revenue growth was 6.0%.
In an article discussing leverage last month I noted
During the Q2 conference call, Chief Financial Officer Bob Cantwell stated:
We finished the second quarter of 2012 with $715.6 million in long-term debt. Our net leverage based on the midpoint of our full year EBITDA guidance is 4.1x.
It was remarkably similar to his statement on the Q3 conference call:
We finished the third quarter of 2012 with $713.4 million in long term debt. Our net leverage based on the midpoint of our 2012 EBITDA guidance is at 4.1 times.
Should investors be concerned that net leverage had not declined?
I also wrote:
Although I will continue to hold B&G and enjoy the current 4% dividend yield, I remain concerned about the fact that the leverage has not declined. Next week B&G will be presenting at the Bank of America Merrill Lynch 2012 Leveraged Finance Conference. The conference certainly seems an appropriate forum to gain further insight into the company's leverage, and if Wenner and Cantwell don't adequately address the static net leverage issue, I will consider reducing my position.
At the conference Cantwell did address leverage. He noted that the recent secondary offering will be used to redeem $101.5 million principal amount of its outstanding 7.625% senior notes due 2018 and would take place on December 28th, reducing long term debt from $718 million to $652 million. In addition, the pro forma EBITDA would increase (compared to Q3) from $162 million to $178 million. This brings the leverage down from 4.1x to 3.7x.
Wenner also touched briefly on debt. He discussed how important it was for the company to not over-pay for acquisitions. Note the last point on one of his slides:
►Branded shelf-stable products with defensible market positions
►Acquiring "like" products affords sales, distribution and G&A synergies
-Provides advantages over private equity buyers
►Focus on brands under $100 million in sales has generally limited strategic buyer competition
►Strong margins generating significant excess cash flow
►Current financing environment has expanded purchase multiples that provide desired accretive cash flow outcome
The lower interest rate environment has led to more product acquisitions passing the company's initial screening process. The company will pay somewhat higher multiples than it has in the past, but Wenner emphasized discipline was still very important. He said that even though the rates work today, he has to consider "will it work 5 years from now when interest rates are 400 basis points higher."
The RBC upgrade with a $32 price target - a target below the recent high of $32.84 does not seem like a ringing endorsement, although the market responded favorably. Still, many investors will find the leverage at B&G too risky. Others will find the dividend attractive and appreciate the company's frequent increases to that dividend.
I remain long with my holdings in B&G Foods, satisfied that leverage will be declining, although I am concerned about the flat growth in pro forma revenues. As long as the company continues to demonstrate the ability to increase the dividend and successfully integrate accretive acquisitions, I will continue to hold. However, as prices remain near or above $30 per share, I am reluctant to add to my position at this time other than through dividend re-investments.
Additional disclosure: I also have covered calls against some of my BGS holdings. I have no positions in any of the other companies mentioned in this article.