Bridgford Foods: A Diamond in the Rough

Bridgford Foods (BRID) delivered solid second quarter results when it recorded sales of $25.6 million (a 2.9% increase) and earnings of 11 cents versus an 8 cent loss. The results were released after Monday’s market close in a 10Q filing (there was no press release). The notable 19 cent swing in earnings was attributable to a substantial drop in input costs (flour and meat). BRID’s gross profit margin soared 850 basis points from 34.3% to 42.8%. Although historically the second quarter is the company’s weakest, BRID still managed to even show a 460 basis point margin improvement on a sequential basis, an impressive feat in itself. Further benefiting the bottom line was a 3% drop in its shares outstanding, from 9.69 million to 9.43 million.

Under covered: The beauty of this equity is the fact it virtually has no research coverage. There are no earnings estimates, upgrades, downgrades or any opinion for that matter. The good thing about this phenomenon is that the stock is so unknown, it leaves plenty of room for new buyers (such as institutions - who currently own less than 3%) to come a courting, one of the criteria investment guru, Peter Lynch (of Fidelity Magellan fame) utilizes when picking undervalued situations.

Costs are stabilizing: A $422,000 savings in fuel costs helped reduce BRID’s SG&A expense by 70 basis points from 36.4% of sales to 35.7%. The company also experienced a 4% decrease in its depreciation from $748,000 to $716,000, and paid no income tax, due to a tax loss carry over. BRID’s cash arsenal ramped up 87%, from $6.1 million to $11.4 million, allowing it more than enough capital to handily complete the 500,000 shares still remaining in its stock buyback program.

The bottom line: BRID has now racked up two quarters in a row of positive earnings. It appears that management’s efforts to rebuild the company are starting to pay off, as momentum is on the rise. A new 52 week high, (it could easily rally to $10 by midsummer) and the reestablishment of its cash dividend, looks like it just might be in the cards. This one might just be the “diamond in the rough” value players are looking for.

Disclosure: Long BRID.

Comments

[Mark Krieger:]

One point I forgot to make. BRID's cash dividend could be about 27 cents a year when it is finally resumed, representing about one third of its annual earnings (allowing coverage to be adequate) This computes to a respectable yield of 4.2%. This could happen by the end of the year.There is a huge amount of incentive to get this dividend payout started again, because management/Board owns such a large stake of the company ( about 80%), they would essentially be paying themselves.

Jun 02 07:27 AM

[y2kurtus:]

Mark you've been sweet on this company and it's management for a while now. I don't blame you... I own a few shares myself so obviously I like the stock. I think the book value understates the value of the real estate BRID holds.

I'll say this about management though, why would they pay a dividend to all shareholders (including the 20% of shareholders who aren't in the family) when they could instead chose just to vote themselves salary increases?

Also from an even more cycinal view point, are you sure that the oldest generation of Bridgfords want the price of the stock to rise sharply in the short-term? I'm not... a low price allows them to sell or gift a larger number of shares to the younger generations of sausage makers. If your an old salt who just likes to see the company stay indipendend and your grandkids have total control over their employment outlook than better to let the price languish somewhat and just hord the cash within the company untaxed rather than pay a dividend which would be taxed at 15%.

All the while the eldest family members can pass on $12,000 worth of depressed stock at say $6 rather than $10

Anyway it's good to see the stock on the rebound but I don't think we will get rich of this one until the buyout comes!

y2kurtus


On Jun 02 07:27 AM Mark Krieger wrote:

> One point I forgot to make. BRID's cash dividend could be about 27
> cents a year when it is finally resumed, representing about one third
> of its annual earnings (allowing coverage to be adequate) This computes
> to a respectable yield of 4.2%. This could happen by the end of the
> year.There is a huge amount of incentive to get this dividend payout
> started again, because management/Board owns such a large stake of
> the company ( about 80%), they would essentially be paying themselves.

Jun 02 10:04 AM

[Mark Krieger:]

Thanks for the feedback and good analysis. what you say has validity and I certainly appreciate it.I respectively disagree about your thought that management would rather vote themselves a pay raise versus paying a cash dividend--they own so many shares, it would be much much more lucrative for them to share the profits via a dividend than to get a pay hike!!


On Jun 02 10:04 AM y2kurtus wrote:

> Mark you've been sweet on this company and it's management for a
> while now. I don't blame you... I own a few shares myself so obviously
> I like the stock. I think the book value understates the value of
> the real estate BRID holds.
>
> I'll say this about management though, why would they pay a dividend
> to all shareholders (including the 20% of shareholders who aren't
> in the family) when they could instead chose just to vote themselves
> salary increases?
>
> Also from an even more cycinal view point, are you sure that the
> oldest generation of Bridgfords want the price of the stock to rise
> sharply in the short-term? I'm not... a low price allows them to
> sell or gift a larger number of shares to the younger generations
> of sausage makers. If your an old salt who just likes to see the
> company stay indipendend and your grandkids have total control over
> their employment outlook than better to let the price languish somewhat
> and just hord the cash within the company untaxed rather than pay
> a dividend which would be taxed at 15%.
>
> All the while the eldest family members can pass on $12,000 worth
> of depressed stock at say $6 rather than $10
>
> Anyway it's good to see the stock on the rebound but I don't think
> we will get rich of this one until the buyout comes!
>
> y2kurtus

Jun 02 05:27 PM