B&G Foods Is Cheaper Than You Think

B&G Foods (NYSE: BGS  ) may be cheaper than you think.

In the daily noise machine of CNBC, analyst estimates, and quarterly announcements, investors are inundated with talking heads obsessing over earnings-per-share figures.

Earnings, or net income, is an accounting construction that is the basis for the price-to-earnings ratio, the most popular way of measuring how cheap or expensive a stock is.

But free cash flow -- the amount of cash a company earns on its operations minus what it spends on them -- is another, oftentimes more accurate measure of earnings that can give you an advantage.

How B&G stacks up                                          
If B&G tends to generate more free cash flow than net income, there's a good chance earnings-per-share figures understate its profitability and overstate its price tag. Conversely, if B&G consistently generates less free cash flow than net income, it may be less profitable and more expensive than it appears.

This graph compares B&G's historical net income to free cash flow. (I omitted various gains and charges such as tax deferrals, restructurings, and benefits related to stock options.)

As you can see, B&G has a tendency to produce more free cash flow than net income. This means that the standard price-to-earnings multiple investors use to judge companies may overstate its price tag.

There can be a variety of reasons to disregard such a discrepancy; for example, free cash flow can overstate earnings in businesses with volatile working capital needs, or understate earnings in high-growth companies that are reinvesting capital in the business.

Alternatively, in cases where free cash flow more accurately measures earnings, such a discrepancy can indicate a company that is more -- or less -- expensive than investors realize.

Let's examine B&G alongside some of its peers for additional context:

Company	Price-to-Earnings Ratio	Adjusted Price-to-Free-Cash-Flow Ratio
B&G Foods	17.0	13.3
Kellogg (NYSE: K  )	15.7	21.2
McCormick (NYSE: MKC  )	16.0	19.7
Diamond Foods (Nasdaq: DMND  )	32.7	N/A*

* Negative free cash flow.

On a net income basis, B&G Foods appears to be more expensive than many of its packaged-food peers. But B&G Foods tends to generate more free cash flow than net income, suggesting that B&G’s stock might be quite a bit cheaper than many investors realize.

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