Is This the Best Way to Play Processed and Packaged Foods?

Investing in food companies often leads to exceptional long-term returns, simply because food is always in high demand. The company featured in this article has been aggressive on the acquisition front, making itself more diversified and geared toward the health-conscious consumer. These acquisitions have helped aid top-line growth, but there's one reason that this growing company isn't likely to be a better investment option than one (or two) of its well-known peers. 

Positioning for future success
B&G Foods recently saw third-quarter net sales jump 17.6% year over year to $181.4 million. However, acquisitions played a big role. For instance, Pirate Brands (acquired in July) contributed $16.5 million, New York Style and Old London (both acquired in October 2012) contributed $11.4 million, and TrueNorth (acquired in May) contributed $5.4 million. If you take away all of the recent acquisitions, sales declined 3.9%, or $6.1 million, due to pricing pressure and weakening volumes.

The bad news is that B&G Foods expects the industry to struggle throughout the remainder of the year. The good news is that it expects the industry to moderate next year. B&G Foods has also made strategic acquisitions that target today's health-conscious consumer

For example, TrueNorth offers nut cluster snacks with no cholesterol, artificial colors, preservatives, or trans-fat, in varieties such as Pom-cranberry Crunch and Chocolate Nut Crunch.

Pirate's Booty is another example of how the company is targeting today's consumer desires. The puffed rice and corn snacks flavored with ingredients such as real aged white cheddar cheese are all gluten- and trans-fat-free.

New York Style offers bagel crisps in seven different flavors, as well as all-natural pita chips. Tasty bagels without all that bread is a good way to go. 

Rickland Orchards (just acquired for $57.5 million) is really hitting consumer trends hard thanks to its Greek-yogurt-coated granola bars and bites. Not only does this hit on the current popularity of Greek yogurt, but it's a grab-and-go item that suits today's on-the-go consumer. Even though Rickland Orchards only launched in March 2012, it has already exceeded net sales of $50.0 million.   

B&G Foods clearly has a ton of growth potential. The big question is whether or not the company can keep net income and debt in check after all these acquisitions.

Safer investment options in the space
In the third quarter B&G Foods saw net income slide 9.2% to $15.4 million. This was primarily due to acquisition-related costs and debt extinguishment. However, B&G Foods still sports a debt-to-equity ratio of 2.48, which is well above the industry average of 1.1.

J.M. Smucker  offers broad diversification in food with fruit spreads, peanut butter, syrups, ice cream toppings, and coffee. This company sports a much healthier debt-to-equity ratio of 0.41. On the other hand, net sales recently dropped 1% in the first quarter year over year. While volume increased, especially for Jif, Crisco, Folgers, and its flour brands, J.M. Smucker had to contend with pricing pressure.

That said, J.M. Smucker is a well-established brand with marketing power that currently yields 2.20%. While this isn't as high at B&G Foods at 3.70%, the clean balance sheet will allow you to sleep at night.

Wouldn't it be nice if there was a similar company with pricing power, volume growth, a clean balance sheet, and a generous yield? Fear not, for that company does exist. It happens to be one of my favorite companies on the planet.

General Mills saw sales increase 8% in the first quarter. For the year, it expects sales to grow in the low single digits and earnings per share to come in at $2.87 to $2.90 -- an improvement over the $2.79 delivered in fiscal year 2012.

These expectations might not blow you away, but that's what General Mills is all about -- slow and steady growth where it never gets ahead of itself. Like B&G Foods, General Mills also targets the yogurt market with Yoplait. Its fruit and energy bar, Larabar, is available in 16 flavors -- all free of gluten, dairy, and soy. On top of that, General Mills owns many household-name brands such as Cheerios, Lucky Charms, Cinnamon Toast Crunch, Green Giant, Betty Crocker, and Pillsbury.

The best part is that General Mills is seeing volume growth and pricing power. This is all while the company aims for global expansion thanks to the rising middle class in emerging markets.

General Mills sports a debt-to-equity ratio of 0.99, and it yields 3.10%. All factors considered, General Mills is highly likely to be a safer investment than B&G Foods -- without sacrificing growth potential.

The bottom line
B&G Foods seems to be making the right moves by targeting the correct consumers. However, it's highly leveraged, which could lead to trouble down the road and limit growth potential. B&G Foods isn't a bad investment; it's just risky. A much safer investment option in processed and packaged food is General Mills. 

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Fool contributor Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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