Shareholders of B&G Foods would probably like to forget the past six months even happened. The stock dropped 58.6% and now trades at $2.18. This might have investors contemplating their next move.
Is there a buying opportunity in B&G Foods, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why do we think B&G Foods will underperform?
Even with the cheaper entry price, we’re cautious about B&G Foods. Here are three reasons you should be careful with BGS, plus one stock we’d rather own.
1. Revenue spiraling downwards
A company’s long-term sales performance is one signal of 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 6% annual rate. This was below our standards and is a sign of poor business quality.
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 20.4% 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
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
B&G Foods’s $2.52 billion of debt exceeds the $591.6 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $273.1 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. After the recent drawdown, the stock trades at 4.3× forward P/E (or $2.18 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. Let us point you toward the most entrenched endpoint security platform on the market.
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