Why General Mills and J.M. Smucker Are Better Picks than B&G Foods

For those looking for a steady long term return from the packaged food and ready-to-eat market space, one company that cannot be ignored is Cheerios maker General Mills (NYSE: GIS  ) , which has seen year-to-date gains of over 20%. In 2012, it was recognized as "The Most Reputable Company in America" by Forbes magazine.

The demand for packaged food items is being fueled by quick service restaurants and fast changing lifestyles. In addition, the rise in commodity prices is also driving sales of ready-to-eat and packaged foods higher. General Mills could be a good way to benefit from this market, although it is not the only player, with B&G Foods (NYSE: BGS  ) and J.M. Smucker (NYSE: SJM  ) as other options.

A look at General Mills
General Mills commenced fiscal 2014 on a strong note. The company reported an increase of 8% in revenue from last year to $4.37 billion . It comfortably beat the consensus estimate of $4.31 billion. Its growth was driven by the acquisitions of new international businesses like Yoki Alimentos in Brazil and Yoplait Canada. In addition, Yoplait Greek yogurt and Pillsbury gluten-free dough also contributed to revenue growth.

General Mills is stepping up its game through acquisitions and new product launches, both domestically and in international markets. As a result of international acquisitions, General Mills experienced a 27% year-over-year increase in international sales to $1 billion in the first quarter of 2014. Moreover, Yoplait International pushed up European sales by 51% versus the same quarter a year ago.

General Mills reported a 6% year over year growth in earnings to $0.70 per share, in line with expectations. For fiscal 2014, earnings per share are expected to grow in high single-digits. Remarkably, General Mills has been able to achieve both volume growth and pricing power at the same time, something its peers haven't been able to accomplish.

B&G's moves
For example, B&G Foods' revenue for the base business decreased by $6.1 million, or 3.9%, versus the same period a year-ago. Out of this, $3.5 million was attributable to a net price decrease and $2.6 million was attributable to a unit volume decrease , so unlike General Mills, B&G Foods lost both on volume and pricing.

B&G Foods, however, more than made up for this decline with a series of acquisitions and it is still continuing to do so. All these acquisitions have proven to be accretive.

For example, Pirate's Brands, acquired at the beginning of July 2013, contributed $16.5 million to the overall increase of $27.2 million in sales in the recently reported quarter. Also, the New York Style and Old London brands, acquired at the end of October 2012, added $11.4 million to revenue. In addition, the TrueNorth brand, acquired at the beginning of May 2013, added $5.4 million.

As a result of these acquisitions, B&G's consolidated results looked solid. It reported a 17.6% year over year growth in revenue to $181.4 million .

Moving a step ahead, B&G Foods recently acquired Rickland Orchards from Natural Instincts, a maker of Greek yogurt-coated granola bars and bites, for $57.5 million. The brand generated annualized net sales of more than $50 million and could lead to continued growth in B&G Foods' top line.

Both General Mills and B&G Foods have looked at acquisitions and mergers for growth. However, a look at debt to equity ratios shows General Mills is better positioned than B&G to make further acquisitions.

GIS Debt to Equity Ratio (Quarterly) Chart

GIS Debt to Equity Ratio (Quarterly) data by YCharts

Smucker keeping investors happy
However, a lower debt to equity ratio is held by J.M. Smucker, which has been following the acquisition path as well. It recently announced the acquisition of California-based Enray for an undisclosed amount. The acquisition is expected to benefit Smucker, as the company will strengthen its position in the natural and organic beverages category with Enray's truRoots brand. As a leader in the natural food space, this $45 million business has the potential to deliver significant growth for the foreseeable future.

Smucker saw a 1% decline in revenue that was mainly due to pricing pressures. However, it kept investors happy by announcing a 12% increase in the quarterly dividend rate and repurchasing 1.5 million shares. The company has outperformed others as well.

GIS Chart

GIS data by YCharts

Thus, Smucker has managed its debt-levels well and has also been able to make acquisitions at the same time.

Taking a pick
In my opinion, investors should consider either General Mills or Smucker for their portfolios. B&G saw a decline in both pricing and volume in the previous quarter, while its P/E ratio of 41 and its debt to equity ratio are also very high. In comparison, General Mills' and Smucker's P/E ratios of 19 and 21.45, respectively, look reasonable. Both of them have been making impressive acquisitions that have helped results improve and they could prove to be better picks than B&G Foods.

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