Three Pantry Powerhouses for Your Portfolio

Since 2009 B&G Foods (NYSE: BGS  ) has raised its dividend annually by 14%, and its stock has soared 562% thanks to a lean and strategic business model. Its brand portfolio has doubled, and the company is committed to at least a 50% return of free cash flow to shareholders--if not 70%--with every new accretive acquisition. And every buy is expected to be accretive right out of the box..

Enviable business model
Maybe baked beans, pickles, and hot cereal don't sound exciting, but B&G Foods is one of the most dependably-growing food companies around. Three year revenue, earnings per share, and dividend growth rates are 8.27%, 31.60%, and 18.09%, respectively. The dividend yield stands at 3.60% and was raised 10% in July.

Also in July, B&G Foods acquired popular healthy snack brand Pirate's Booty for $195 million. It acquired healthy nut snack bar brand True North in May. In 1996 B&G Foods was basically just a pickle company eking out $82 million in sales. The company now has 33 brands, almost wholly in the US and Canada, and earned $633.8 million in net sales in 2012.

It's an enviable business model; the company takes shopworn food brands, shines them up, and trots them out again with a little marketing and promotion. B&G Foods either acquires these brands for a song from food giants, such as Pillsbury or Nestle, or takes over small independents. B&G's target acquisitions usually earn less than $100 million in sales annually before the company snaps them up.

At the Barclays Back to School conference, B&G Foods' CFO Bob Cantwell explained that this strategy keeps competition low for the company's bids.  Even better, it's been buying brands that tap into multiple consumption trends: Hispanic foods, crock pot cooking, and healthier food alternatives.

This feisty little company has less than 1,000 employees and is committed to keeping costs down, having saved $15 million in 2011-12. Cantwell added, "... our EBITDA of 26.5% of sales equates to 25% free cash flow after CapEx as a percentage of sales."  Those capital expenditures come in at a very low 1.6% of sales. A gross margin of 37.40% and net profit of 6.80% are higher than the company's own historical and industry average.

So that's what's right about the company. What isn't right is its valuation has gotten out of hand--it now trades at over 40 times trailing earnings. Its five year P/E low was 8.00, with the yield over 6% at that time. B&G's price to sales at 2.89 is higher than rival Pinnacle Foods (NYSE: PF  ) at 1.20 and the industry average of 1.50.

A "brand" new rival
Pinnacle Foods debuted in March and has a business model that's almost identical to B&G's. The exception is not all of Pinnacle's acquisitions make shelf-stable products..

You're probably familiar with Pinnacle's 25 brands, which are found in 85% of US households. The company's leadership brands are Mrs. Butterworth's syrup, Vlasic pickles, Duncan Hines, Mrs Paul's, Birds Eye, and Aunt Jemima. These brands had a net sales compound annual growth rate of 2%, 30% gross profit margin, and generated 74% of 2012's gross profit dollars. Ten of the company's leadership brands hold the No. 1 or No. 2 position in the US market. Of note, the company's Vlasic pickles hold the No. 1 market share, competing with B&G's pickles.

Pinnacle estimates long term organic growth of 10%-12%, with accretive acquisitions accelerating growth even faster. They presented this estimate at both their IPO roadshow and the Barclays Back to School Consumer conference in September.

The company pays a dividend with a 2.70% yield. However, it has a lot of debt; $2 billion remains after the $667 million of the IPO proceeds earmarked for de-leveraging when Blackstone took Pinnacle public. Blackstone still owns 70% of the common stock after buying Pinnacle in 2007.

Pinnacle is more richly valued at 43.40 times trailing earnings, although the forward earnings multiple comes down to 15.53. The company calls its business model "Reinvigorating Iconic Brands," and it generally buys and then makes over well-known brands. Pinnacle recently purchased Wish-Bone Brand salad dressings for $580 million, which should be accretive to 2013 EPS by $0.01-$0.02. This expected accretion was why Pinnacle raised guidance for the back half of the year.

Pinnacle now has two earnings releases under its belt. Year to date EPS comes in at $0.03 with revenue of $1.18 billion. Both Pinnacle and B&G Foods disappointed on second quarter earnings, but competitor Treehouse Foods (NYSE: THS  ) , a private label manufacturer of pickles, salad dressings, and hot cereals, reported better than expected earnings.

Treehouse grows by acquisition, and it most recently bought Associated Brands, a maker of powdered drinks, specialty teas, and sweeteners, for $180 million.Although Treehouse Brands trades at a lower trailing multiple of 29, it has no yield.

THS Total Return Price Chart

THS Total Return Price data by YCharts

The Foolish takeaway
Pinnacle Foods may be larger and have more iconic brands than its competitors, but it debuted only recently. Its iconic brands also cost more to acquire, and attract more competitive bids. B&G Foods is not an undiscovered gem anymore, but it will help your profits grow as it expands its own brand portfolio.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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