How High Can B&G Foods Fly?

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Shares of B&G Foods (NYS: BGS) hit a 52-week high on Wednesday. Let's take a look at how it got there and see whether clear skies are still in the forecast.

How it got here
With commodity costs rapidly rising, it's a bit surprising to see a company like B&G Foods, which supplies shelf-stable foods and non-food consumer goods, trading at a new high. Then again, with the way the company has sought to acquire smart, stable cash flow products throughout the years, the move higher shouldn't be that surprising.

For years, B&G has angled its business toward acquiring strong brand-name products and allowing those products' names to spur growth. In 2003, it acquired part of Ortega from Nestle; in 2007, it purchased the Cream of Wheat line of products from Kraft Foods (NYS: KFT) ; and just last year it purchased a portfolio of brand-name products, including Mrs. Dash and Kleen Guard, from Unilever (NYS: UL) . This diverse portfolio of products allows B&G to pay out one of the best dividends in the consumer goods sector at 4.4%.


On the flip side, concerns still remain despite its recent success. For one, can the company actually grow organically? We've seen that B&G is excellent at recognizing the value of stable food and non-food products, but can it really grow its bottom line without acquisitions? Second, does the company have true pricing power amid rising costs, or is this simply being masked behind its myriad acquisitions? Finally, can B&G really compete with significantly larger peers -- like General Mills (NYS: GIS) and J.M. Smucker (NYS: SJM) -- considering its already heavy debt burden?

Plenty of solid acquisitions so far, yet still many questions left to be answered.

How it stacks up
Let's see how B&G Foods compares to its peers.

BGS Chart

BGS data by YCharts.

As you can see from above, B&G's significantly higher debt load was quite the burden in the 2009 recession, but has now given it the upper hand as the economy has bounced off its lows.

Company

Price/Book

Price/Cash Flow

Forward P/E

Debt/Equity

B&G Foods5.014.716.7302%
General Mills3.513.113.893%
J.M. Smucker1.618.714.538%
Kraft Foods1.813.514.577%

Sources: Morningstar and Yahoo! Finance.

This biggest takeaway from the above metrics is B&G's highly levered business in relation to its peers. Carrying debt is common for many food producers, but B&G's 302% debt-to-equity could be a bit excessive. It definitely helps explain why B&G's stock took the biggest hit during the economic downturn in 2008 and 2009.

Aside from that fact there appear to be only marginal differences between these companies. J.M. Smucker appears to be at the most attractive overall valuation based on these metrics. Then again, it has also missed Wall Street's earnings forecast for two straight quarters, so its value does come with built-in skepticism.

General Mills is attempting to break out of being just a breakfast cereals and desserts company, but breaking that mold isn't as easy as it sounds. It has also missed EPS estimates in two straight quarters due to rising commodity costs.

Kraft could be the most stable business of this group as it looks to boost shareholder value by spinning off its snack division at some point in the near future.

What's next
Now for the $64,000 question: What's next for B&G Foods? The answer is going to depend on whether the company's products can hold up in the wake of rising commodity costs and if it can reduce its debt to manageable levels while also adding to its portfolio of brand-name products.

Our very own CAPS community gives the company a highly coveted five-star rating, with an overwhelming 96.2% of members expecting it to outperform. In true contrarian fashion, I count myself among the 3.8% who have made a CAPScall of underperform on B&G and currently find myself down 10 points on that call. I don't, however, have any plans of closing the pick.

The reason is B&G's overwhelming debt load, which gives the company extra risk if global discretionary spending turns south. Its primary products are pretty well shielded from economic downturns, but its inability to grow through acquisitions if the market heads lower will expose what I suspect is weak organic growth that's being pressured heavily by rising ingredient costs. B&G's dividend is tempting, I'll give it that, but there's really no reason it should command a price premium to Smucker or Kraft Foods, which are far more stable businesses with brighter outlooks.

The good news is that, even if B&G Foods isn't the stock for you, there are plenty of other American companies ready to take advantage of emerging market growth. Our analysts at Stock Advisor have identified three that they'd be happy to share with you, for free, by simply clicking here.

Craving more input on B&G Foods? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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