After the market closed on Friday, B&G Foods (BGS) announced that it had bought half a dozen brands from Unilever NV (UN) for approximately $325 million in cash. B&G expects the six brands - Mrs. Dash, Molly McButter, Sugar Twin, Baker’s Joy, Static Guard and Kleen Guard - to generate $35-$38 million in EBITDA in 2012. The market's reaction has been quite favorable, with the price of the stock hitting a 52-week high of $21.74 (as of this writing).
This latest announcement by B&G caps a month of good news that also saw the company increase full-year EBITDA guidance to a range of $127-$129 million and increase the annual dividend 9.5% to $0.92 per share. I should point out that I have been long the stock for quite a while and really like the dividend and its current yield of 4.3%, well above its peer group.
B&G Foods is a manufacturer of shelf-stable food products with several well-known brands, including Cream of Wheat cereal, Accent, Ortega salsa, Polaner jellies and B&M baked beans. B&G has continued to grow by acquiring "orphan brands" from other large companies and successfully integrating them into its product portfolio. Orphan brands are typically products that are profitable for larger companies, but for some particular reason no longer fit into the selling company's corporate plans. These reasons are usually that the brand is too small for the selling company to devote resources to managing the product, or that the company has chosen to go in a different direction.
Those interested in trading based on technical analysis or based on charts might want to look at an item that appeared Thursday on Forbes.com, titled "B&G Foods Inc Shares Enter Overbought Territory." The article notes that B&G has a Relative Strength Index of 71.6, and that above 70 (on a scale of 0-100) is considered overbought. They also note that it is significantly above the 59.9 average of a dividend-paying peer group.
I am not much of technician. I prefer to look at the fundamentals of a company, and focus in more on the company's management and free cash flow. It is the FCF that funds a growing dividend and, in the case of B&G, the acquisitions. B&G continues to build up cash, with its cash balance at the end of September at $98.1 million vs. $87.5 million one year earlier. Its annual dividend payout is $43.9 million. Management has shown an ability to maintain and grow margins in an environment that has seen their costs driven higher by rising commodity costs. This has been accomplished through a combination of cost controls, hedging and price increases. All of these factors are important when looking at an investment.
The six products being acquired generated $90 million in revenue for the 12 months ending September. The EBITDA as a percentage of revenue is about 40% and substantially above the company's historical performance. All of these factors help explain the stock market reaction.
I do have two reservations: Four of the six products seem to fit well into their product portfolio. The other two - Static Guard and Kleen Guard - are a departure for them. I look forward to the company's conference call scheduled for November 1, when I expect to hear the issue addressed. Is it looking to diversify? Were the six products a package deal, and does the company plan to sell these two outliers to a third party?
The other issue is a timing standpoint. The share price can move very rapidly on news, and I hate to overpay for anything. As I get ready to submit this article midday Monday, the share price is still up about 7% around $21 in a down market on high volume (already more than double its average daily volume). The shares still provide value for those looking for dividend yield, although shorter-term capital appreciation may be limited because of its recent run-up in share price.