Shareholders of B&G Foods would probably like to forget the past six months even happened. The stock dropped 26.5% and now trades at $6.75. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy B&G Foods, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.Even with the cheaper entry price, 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.
Why Do We Think B&G Foods Will Underperform?
Started as a small grocery store in New York City, B&G Foods (NYSE:BGS) is an American packaged foods company with a diverse portfolio of more than 50 brands.
1. Long-Term Revenue Growth Flatter Than a Pancake
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, B&G Foods struggled to consistently increase demand as its $1.96 billion of sales for the trailing 12 months was close to its revenue three years ago. This was below our standards and is a sign of poor business quality. 
2. EPS Trending Down
Analyzing the 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 27.8% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy 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 $2.08 billion of debt exceeds the $54.69 million of cash on its balance sheet. Furthermore, its 7x net-debt-to-EBITDA ratio (based on its EBITDA of $296.1 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. Following the recent decline, the stock trades at 8.7x forward price-to-earnings (or $6.75 per share). While this valuation is optically cheap, the potential downside is still huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.
Stocks We Like More Than B&G Foods
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