At the end of September I wrote an article titled "B&G Foods Looks Ripe For Takeover By ConAgra." The article was about a WBBR radio interview with Scott Rothbort, founder and president of LakeView Asset Management, LLC, where he recommended B&G Foods (NYSE:BGS) and speculated that it was a possible takeover target by ConAgra (NYSE:CAG) after ConAgra had been rebuffed by Ralcorp (NYSE:RAH). Rothbort was correct about ConAgra looking for other acquisitions, but it wasn't B&G. Instead, last week ConAgra announced that it had agreed to acquire National Pretzel Company.
Yesterday (on Monday, November 14th), Rothbort was back on WBBR and was asked what to do with B&G Foods in light of their recent announcment to acquire six brands from Unilever, NV (NYSE:UN). He said that with B&G Foods having reached a 52 week that day, he had decided to sell. He noted that the price had increased from $16.70 when he recommended it to more than $22 and he had taken his money off the table.
The stock reached a high of $22.69 before closing at $21.92. Today it has been back over $22. I have held B&G for a number of years and at times have recommended it in articles on SA over the past six months. Mainly I liked the dividend (yielding about 4.2%) that was higher than most other companies in the food sector, including Smucker (JMS) at 2.5%, Kraft (KFT) at 3.3%, PepsiCo at 3.3% and Sara Lee (SLE) at 2.5%.
Rothbort may be right about selling. There have been comments by Seeking Alpha members that would seem to agree with him. Paul Price wrote:
Have you looked at their debt-laden balance sheet?
They had $478 million in total debt (as of Oct. 1, 2011) and just $98 million in cash on their books. This purchase will add another $325 million in debt.
Tangible book value was already a negative number starting 2011.
Management's increase of the dividend is insane pandering to yield-hungry investors in the face of such a crushing long-term debt situation.
BGS shares could be crushed in the next credit crisis...
And, montrachet wrote:
Way too expensive for my taste.
The multiples and ratios are out of line, the stock price will adjust in time to its true value.
I doubt this acquisition will be accretive as of day one.
Div growth has no consistency as well.
I first wrote about B&G in mid-June when it was trading at about $17.50 and yielding close to 5%. Within two weeks it was over $21 and I wrote a follow up article where I noted that it had become a bit too expensive and the yield was no longer quite so attractive. I concluded that article with "...it is probably more advantageous to wait for a pullback in the share price."
B&G is very different today than it was in mid-June. They announced a significant acquisition that will be accretive to earnings and cash flow in 2012. The dividend was increased by 9.5%. The company has increased prices on some of their products and has announced additional increases to take place next February.
On the cost side, the company has been very diligent in controlling costs. Their biggest food supply cost is wheat used in their Cream of Wheat cereals. Wheat costs have been on a tear the past year and a major cause of food price inflation. (Some political analysts believe the cost of wheat to have been a contributing factor the Arab Spring and the Egyptian demonstrations that brought down the government.) B&G hedges their wheat costs and they are controlled through the next six to nine months. In the intermediate term, wheat prices have peaked and are now declining.
Are there risks? Of course, as there are with any stock. Their leverage at 4.3 times debt to EBITDA is too high for some. There are positives, including the recent acquisition that has diversified the product portfolio. Now, although the share price is back over $21, the dividend increase has made the yield more attractive than it was in June. Finally, management's belief that the leverage will quickly be brought down along with an accretive acquisition that improves EPS and cash flow make the risk acceptable for me.
Additional disclosure: I have no positions in the other stocks mentioned in this article. I have covered calls on some of my positions, and may close or roll them forward at any time.