Over the past six months, B&G Foods has been a great trade, beating the S&P 500 by 9.6%. Its stock price has climbed to $5.34, representing a healthy 14.9% increase. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in B&G Foods, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think B&G Foods Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why BGS doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. B&G Foods struggled to consistently generate demand over the last three years as its sales dropped at a 5.4% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for B&G Foods, its EPS declined by 23.1% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
B&G Foods’s $1.95 billion of debt exceeds the $56.29 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $272.2 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. B&G Foods could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope B&G Foods can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
B&G Foods falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 8.8× forward P/E (or $5.34 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
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