Pat McKeough recently replied to one of his Inner Circle Members who wanted his opinion on a firm that takes an unusual approach to growth in the packaged food business.

B&G Foods manufactures and sells many well-known brands. But it has also furthered its growth by acquiring brands that other big food companies are ready to discard due to lagging sales. Pat describes B&G’s attempts to breathe new life into these lagging brands. But he also takes note of the rising costs and high debt facing the company. 

Q: What is your opinion of B&G Foods? Is it a good investment or not? Thanks.

A: B&G FOODS (symbol BGS on New York; www.bgfoods.com) manufactures, sells, and distributes a wide range of prepackaged food and household products in the U.S., including Puerto Rico, and Canada. Its product line is large: hot cereals, fruit spreads, canned meats and beans, bagel chips, spices, seasonings, hot sauces, wine vinegar, maple syrup, molasses, salad dressings, sauces, taco shells and kits, salsas, pickles, peppers, tomato-based products, puffed corn and rice snacks, nut clusters, yogurt-coated granola bars, and other specialty products.

The company’s more than 50 brands include Cream of Wheat and Green Giant frozen vegetables. Other brands include Las Palmas, Le Sueur, Mama Mary’s, Maple Grove Farms, Mrs. Dash, New York Style, Ortega, Pirate’s Booty, Polaner, Spice Islands, Victoria sauces, Back to Nature, and SnackWell’s.

B&G continues to grow by acquisitions—its purchases over the last three years have more than doubled its sales. The company aims to continue to grow by buying brands that have suffered from the neglect of the big food companies that own them. Sluggish sales have pushed Nestlé SA, General Mills Inc. and other conglomerates to shed laggard brands in recent years, in order to focus on their most popular products.

Most recently, in October 2017, B&G completed the acquisition of SnackWell’s cookies and Back to Nature granola bars for $162.5 million. It bought the brands from a joint venture between Oreo maker Mondelez International Inc. and private-equity firm Brynwood Partners.

Nabisco created SnackWell’s in 1992 at a time of high demand for low-fat products. At its peak, the brand’s Devil’s Food Cookie Cakes and other treats generated more than $500 million in annual sales, but their popularity waned as consumers shifted to low-carbohydrate and low-sugar diets. About five years ago, Mondelez sold controlling interest in SnackWell’s and Back to Nature to Brynwood Partners. Sales of SnackWell’s products have continued to struggle, but Brynwood had more success boosting Back to Nature by introducing new products and getting them into more stores. Today SnackWell’s and Back to Nature generate about $80 million in annual sales.

Growth stocks: Dividend yields a high 6.8% and appears sustainable

B&G’s revenue rose 17.0%, from $725.0 billion in 2013 to $848.0 billion in 2014. Revenue then climbed to $966.4 billion in 2015 before jumping 43.8%, to $1.39 billion in 2016. That big gain came mostly from the acquisition of Green Giant in November 2015 for $765 million. For 2017, sales again jumped, 20.1% to $1.67 billion. That last gain was mainly due to the purchase of the spices and seasonings business of ACH Food Companies for $365 million.

B&G’s earnings in 2013 were $76.3 million (or $1.43 a share). Earnings rose 1.0% in 2014, to $77.1 million (or $1.44 a share). They then fell 10.4% in 2015, to $69.1 million (or $1.22 per share). Profit rebounded 89.7% with the Green Giant acquisition in 2016, to $131.1 million (or $2.07 a share). Earnings again rose, 13.0% in 2017, to $148.1 million ($2.15 a share).

A key part of the company’s strategy is to devote attention to the lagging brands it buys. That includes adding new products or brand extensions to those products as eating habits change. For example, B&G is now launching new innovations for its Green Giant frozen vegetables. The latest is vegetable noodles—made from zucchini, beets, carrots or butternut squash—as an alternative to wheat pasta. Each type of noodle is gluten-free and offers around 65% to 90% fewer calories than typical pasta.

Like all packaged-food makers, B&G is dealing with higher costs for things such as freight and transportation. However, the company recently succeeded in implementing portfolio-wide price increases. It also cut costs across the board.

B&G’s long-term debt is very high at $2.1 billion, or 114% of its market cap. That adds risk. The company also holds cash of $206.5 million.

The stock trades at just 13.1 times this year’s forecast earnings of $2.13 per share. B&G’s shares yield 6.8%. That’s high, but the dividend appears sustainable.

Inner Circle recommendation: B&G Foods is okay to hold for aggressive investors only.

What to Read Next

Double the number of dollar stores.

9 tips for fast growth stocks.