B&G Foods (BGS) reported earnings after the market closed on February 14th that met the midpoint of its 2012 Adjusted EBITDA guidance of $168-$170 million and issued 2013 Adjusted EBITDA guidance of $188-$192 million. Using the 2013 guidance midpoint of $190 million, that would represent a 12.4% increase and a solid growth rate. So, why was Wall Street unimpressed and why were the shares sent lower by $2.20, or 6.8%, to close at $30.04 the next day? And why have the shares continued to trade below $30 since then?
There were several other positives in the year end report:
- Revenue increased $89.9 million (16.5%) for the year
- The acquisition of New York Style® and Old London® brands from Chipita America, Inc. in the fourth quarter contributed $8.4 million dollars to the company's revenue
- Debt was refinanced and total debt was reduced bringing pro forma leverage down to 3.6x
- Introduction of new distribution model in Canada leading to reduced costs
- The dividend was increased twice in 2012
For those unfamiliar with B&G, the company sells a variety of shelf- stable food products, including several well known brands, such as Cream Of Wheat, Ortega, Mrs. Dash, Ac'cent and Polaner. It has a history of growing by acquiring orphan brands from larger competitors and then rejuvenating those brands. These efforts include increased marketing, adding additional flavors and resizing packages to be able to push sales through dollar stores.
Its acquisition and leverage model have been working well, enabling the company to pay higher dividends than most of its competitors. B&G's current $1.16 dividend yields 4.0%, compared to J. M. Smucker (SJM) at 2.2%, General Mills (GIS) at 2.9%, Kellogg (K) at 2.9% and Pepsi (PEP) at 2.9%.
CEO David Wenner considers B&G to be very shareholder friendly and demonstrates that through increasing the dividend. The dividend has been increased four times since the end of 2010, and that dividend, and its growth, are one of this investment's main attractions. I fully expect another dividend increase later this year.
What's the Problem?
Despite meeting the midpoint of its guidance, the analysts were looking for the company to beat guidance. On the recent conference call, Wenner had a lengthy exchange with Robert Moscow of Credit Suisse over the company's guidance and whether or not it missed current guidance and whether 2013 guidance was lower than the street expected. Based on the share price reaction, the market voted the earnings as a miss.
The bigger issue is that much of the B&G model is based on rejuvenating the orphan brands it acquires. That didn't happen in 2012. The revenue growth came from the Culver Specialty Brand, or CSB, acquisition that was completed in early 2012, the Chipita acquisition that was completed in Q4, and price increases that took place in late 2011 and early 2012.
Wenner had this to say about unit volumes:
First quarter we say volume go down 1.7%, second 3.6%, third quarter was down 1.9% improving, and if I discount Sandy it could that volume was down 1% in the fourth quarter. So, there's an improving trend here. We just didn't quite get there and when you look at Nielsen, you can see that things are crawling back to flat in all of the categories, but they're not there yet.
The revenue grew nicely despite the unit volume declines, but those declines should be a concern to all investors.
The company picked up eight new brands, including two non-food brands, a new manufacturing facility, a new sales force and a new business model in Canada in just over 12 months. It's possible that the rapid expansion has hampered the company's ability to maintain its focus and the reason the company is still "crawling back to flat." Nevertheless, it's a bad sign when a company that is focused on acquiring and rejuvenating orphan brands shows unit volume declines.
Looking ahead, another point to consider is the impact of the payroll tax increase. Many of the B&G products carry a premium price, and consumers that are most affected may choose to trade down to lower priced store brands. Wenner said:
The wild card as we enter 2013 is now the payroll tax increase, which will most certainly squeeze a large percentage of people. The question still to be answered is, will that result in a pullback to cooking at home, which could benefit us or a more general pullback as we've seen in 2012.
Investors have a lot to consider and follow as 2013 progresses. Fortunately, Wenner is a very open CEO and makes himself widely available for interviews and analyst conferences. Investors should take advantage of these opportunities to learn more about the company between the regular quarterly conference calls.
In the meantime, I remain long B&G, but will not add to my position (other than through dividend reinvestment) at this time. My last purchase was in October 2012, when I was able to acquire shares at a net cost of $26.70 by buying the stock for $28 and selling a $30 May covered call for $1.35. Using the current share price of 29.23 and the $30 August calls (at about $1.35) does not provide an attractive enough entry point.
Finally, I still find the dividend attractive and expect it to be increased later this year.
Additional disclosure: I have no positions in the other companies mentioned in this article and have covered calls written against a portion of my BGS position.