Equity Analysis and Valuation of B&G Foods, Inc.

Equity Analysis and Valuation of B&G Foods, Inc.

David Hall [email protected]

Juan Parra-Vazquez [email protected]

Olzhas Alexandrov [email protected]

Taylour Bennett [email protected]

Tomy Otounga [email protected]

TR 12:30-1:50 class

mailto:dhall36@

mailto:[email protected]

B&G FOODS EVALUATION 2

Table of Contents

Executive Summary of B&G Foods, Inc. 7

Industry Analysis 7

Accounting Analysis 9

Financial Analysis 10

Valuation Analysis 13

Company Overview 14

Business Products 14

Sales Volume and Growth 15

Competitors 17

Industry: Processed and Packaged Goods 17

Market Capitalization of Firm 18

Location 18

Stock Performance 19

Introduction to the Five-Force Analysis 21

Rivalry among Existing Firms 22

Threat of new Entrants 26

Threat of Substitute Products 27

Bargaining Power of Buyers 28

Bargaining Power of Suppliers 29

Industry Sales and Growth 31

Revenue 32

Market Capitalization 33

Conclusion 34

Analysis of Key Success Factors for Value Creation in the Industry 35

First Mover Advantage 35

Diversified Products 37

Lower-Input Costs 38

Retailer Relations 40

Brand Awareness 41


Conclusion 42

Cost Leadership 43

Competitive Advantage 43

Economies of Scale and Scope 44

Efficient Production 45

Simpler Product Designs 45

Low-Cost Distribution 45

Conclusion 46

Accounting Analysis 47

Key Accounting Policies 48

Type 1 Accounting Policies 49

Cost Leadership 49

Product Quality 50

Type 2 Accounting Policies 51

Research & Development 51

Goodwill 52

Assessing Key Accounting Policies 53

Accounting strategy 53

Accounting for Goodwill 54

Accounting for pension Liabiliites 55

Conclusion 57

Evaluate Accounting Strategy 57

Research and Development 58

Goodwill and Intangibles 58

Capital vs. Operating leases 59

Currency Exchange 60

Conclusion 61

Quality of Disclosure 62

Internal and External control 64

Fair Value vs. Carrying value 64

Key financial disclosure 65


Areas lacking disclosure 67

Conclusion 68

Identify Potential Red Flags 68

Asset write-offs 69

Amortization of Intangible Assets 69

Operating Leases 70

Goodwill 71

Conclusion 71

Undo Accounting Distortions 72

Goodwill Analysis Summary 74

Income Statement Restated 75

Balance Sheet Restated 78

Introduction to Financial Analysis 83

Ratio Analysis 83

Liquidity Ratios 83

Current Ratio 84

Quick Asset Ratio 85

Conclusion 86

Operating Efficiency Ratios 86

Inventory Turnover 87

Days Supply Inventory 88

Accounts Receivable Turnover 89

Days Supply Outstanding 90

Cash to Cash Cycle 91

Working Capital Turnover 92

Conclusion 93

Profitability Ratios 93

Gross Profit Margin 93

Operating Profit Margin 95

Net Profit Margin 96

Asset Turnover Ratio 97


Return on Assets 98

Return on Equity 98

Conclusion 100

Capital Structure Ratios 100

Debt to Equity 101

Times Interest Earned 102

Altman’s Z-Score 103

Internal Growth Rate 104

Sustainable Growth Rate 105

Conclusion 106

Financial Forecasting 106

Income Statement 107

Balance Sheet 110

Cash Flow Statement 114

Conclusion 117

Cost of Capital Estimation 118

Cost of Debt 119

Cost of Equity 120

WACC 124

Conclusion 126

Method of Comparables 127

PE Ratio 128

PE Trailing Ratio 129

Price to Book 130

Dividend to Price 130

P.E.G. Ratio 131

Price to EBITDA Ratio 132

Price to Free Cash Flow Ratio 133

Enterprise Value 133

Intrinsic Valuation Methods 134

Discounted Dividends 134


Discounted Free-Cash Flows 136

The Residual Income Method 138

Abnormal Earnings Approach 139

Residual Income Perpetuity 141

Works Cited 143

Appendix 145


Executive Summary

Analyst Recommendation: Sell (Overvalued)

April 1, 2016

Industry Analysis

B&G Foods is a firm that manufactures, sells and distributes shelf-stable

food products operating in the processed and packaged food industry. B&G Foods

owns several recognized brand names and operates in the United States, Canada

and Puerto Rico. The main competitors for B&G Foods include Kellogg, General

Mills, and the J.M Smuckers group. The processed and packaged food industry is

highly competitive with firms establishing their market position through the use of

cost leadership strategies and operating efficiencies. The industry as a whole is a

$4.4 trillion market which is expected to grow to $5.0 trillion in the following year

(RTS Resources). Two of the primary competitive advantages which industry

Observed Price 2011 2012 2013 2014 2015

52 Week Range Scores 1.62 2.14 1.86 1.65 1.4

Revenue

Market Capitalization

Shares Outstanding

As Stated Restated Valued

Trailing P/E 43.56 51.06 Overvalued

Return on Equity Forward P/E 45.3 50.34 Overvalued

Return on Assets Price to Book 40.81 47.04 Overvalued

Dividend tp Price 39.84 N/A N/A

Regression R Squared Beta P.E.G. Ratio 38.84 42.12 Overvalued

24 months 0.06% -0.06 Price to EBITDA 44.11 42.78 Overvalued

36 months 0.77% -0.20 Price to FCF 18.54 N/A N/A

48 months 0.05% -0.05 EV/EBITDA 31.18 29.37 Undervalued

60 months 3.61% 0.42

72 months 3.95% 0.41

Valued

33.37 Faily Valued

Actual Lower Upper Free Cash Flows 34.98 Faily Valued

Cost of Equity 8.53% 4.15% 12.91% Residual Income 37.29 Overvalued

WACCBT 4.82% 3.91% 5.72% 37.96 OvervaluedWACCAT 3.50% 2.60% 4.41%

Long Run Residual Income

Discounted Dividends

Intrinsic Based Valuations

BGS NYSE (04/1/2016) Altman Z-Scores

$34.66

Financial Based Valuations

Cost of Capital

$28.12 - $44.00

$2.17 Billion

62.64 Million

$966.36 Million

20.44%

3.27%


leading firms exhibit are low cost distribution and economies of scale. The

competition level currently seen in the processed and packaged food industry was

evaluated using the five forces model and is shown below.

Five Forces Model

Rivalry Among Existing Firms High

Threat of New Entrants Low

Threat of Substitute Products High

Bargaining Power of Customers High

Bargaining Power of Suppliers Medium

Rivalry among existing firms was considered to be high because of the

amount of firms within the industry along with the homogenous nature of the

products sold by each firm. Thus, the most competitive advantage a firm can

develop within the industry is based on cost leadership. The threat of new entrants

to the processed and packaged food industry is considered to be low due to the

significant barriers to entry including distribution network and resources required

to attain the sales volume industry leaders’ experience. Furthermore, this level of

sales would be required for a firm to enter the industry and have the pricing

necessary to compete within it.

Threat of substitute products within the processed and packaged food

industry is considered to be high due to the similar characteristics of the products


sold by firms. The synonymous nature of the products sold in this industry causes

the customer to seek out the lowest pricing rather than selecting a product based

on brand loyalty. Bargaining power of customers was found to be high within this

industry because of the similarity of products leading to a high availability of

substitute products. The bargaining power of the supplier is regarded as medium

primarily because of the differentiation present in the industry. Suppliers with a

larger network of clients are able to employ higher quality and lower distribution

costs therefore implementing cost leadership strategies.

After evaluating the five forces model, cost leadership proved to be the most

significant competitive advantage present in the industry. These cost leadership

strategies are achieved through the use of low cost distribution, economies of scale

and inventory management.

Accounting Analysis

In order to find the value of a company, it is necessary to look at key accounting

policies and how they affect the overall financials of the firm. Variability exists in

the reporting of key accounting policies as the Generally Accepted Accounting

Policies allows for it. This can drastically affect how a firm is valued and thus,

whether it is over or undervalued.

The amount a firm discloses in its financial reporting affects how assuredly a firm

can be accurately valued. By evaluating B&G Foods type 1 accounting policies, the

key success factors of the industry, and type 2 accounting policies, regarding

operating leases, we were able to determine possible red flag accounting policies

that could affect B&G Foods’ valuation.


Type 1 accounting policies dealt with the key success factors of firms in the

industry. B&G Foods has good disclosure of type 1 accounting policies in that they

meet or exceed the industry standard in information reported. Type 2 accounting

policies dealt with the disclosure of operating lease structures. B&G Foods had a

substantial amount of goodwill when compared to net fixed assets, which was thus

analyzed further for distortion. We found that B&G Foods’ goodwill needed to be

restated to accurately value the company. Overall, B&G Foods had a relatively low

amount of disclosure related to type 2 accounting policies.

Since goodwill is over 20% of net fixed assets, we had to restate the

financials to accurately display goodwill. In order to do so, we amortized goodwill

over a five year period. By doing so, we were able to restate the goodwill later in

the report, leading to higher disclosure allowing us to more accurately value the

firm. Due to the lack of financial disclosure in type 2 accounting policies, we found

that we could not accurately value B&G Foods. Therefore, it was necessary to

restate the financial statements to find an accurate valuation of the company.

Financial Analysis

Conducting a financial analysis of a firm consists of evaluating their liquidity,

profitability and capital structure ratios in order to assess their performance

relative to their benchmark competitors. Liquidity ratios are used to determine a

firm’s ability to repay their obligations in case they experience an unfavorable

economic event. The liquidity ratios we used include the quick asset, current,

inventory turnover, accounts receivable turnover, days’ supply inventory, accounts

receivable days, cash to cash cycle, and working capital turnover. Below is a table

listing B&G Foods’ standing in each of the liquidity ratios along with their relative

competitors.


The following portion of the financial analysis involves ratios related to B&G

Foods’ profitability. These ratios evaluate the firm’s performance in regard to profit

when evaluating their respective sales. The ratios we used to determine their

profitability include gross profit margin, operating profit margin, net profit margin,

asset turnover, return on assets, and return on equity. These ratios are important

for investors to evaluate whether the firm provides adequate profits for

shareholders and to determine if the firm is experiencing operating efficiencies

relative to their assets. As seen in the table below, B&G Foods would benefit from

increases in operating efficiencies due to their current low performance, on an as

stated and restated basis, in each of the ratios relative to their benchmark

competitors.

Ratio Performance Trend

Current Ratio Outperforming Increasing

Quick Ratio Average Stable

Inventory Trunover Underperforming Decreasing

Days Supply Inventory Underperforming Decreasing

Accts Receivable Turnover Average Stable

Accts Receivable Days Average Stable

Cash to Cash Cycle Underperforming Decreasing

Working Capital Turnover Average Stable

Liquidity Ratio Analysis


Sales Growth Underperforming Decreasing

Gross Profit Margin Underperforming Decreasing

Operating Profit Margin Average Increasing

Net Profit Margin Underperforming Stable

Asset Turnover Underperforming Decreasing

Return on Assets Underperforming Decreasing

Return on Equity Average Stable

Profitability Ratio Analysis


The final step in completing the financial analysis for B&G Foods involves

evaluating how the firm finances their assets. This portion of the financial analysis

is used to see what mix of debt financing and equity financing the firm is currently

using. The ratios we used to evaluate B&G Foods’ capital structure include debt to

equity, times interest earned and Altman’s Z-Score. Debt financing is considered

to be riskier for a firm due to the pressure to meet interest payments and avoid

bankruptcy. The Altman’s Z-Score is used to determine a firm’s bankruptcy

likelihood. Scores below 1.8 indicate the firm is likely to experience bankruptcy,

and scores above 3.0 indicate that the firm is unlikely to face bankruptcy. As seen

below, B&G Foods has historically maintained a low Altman Z-Score and also seems

to be underperforming their benchmark competitors in some of these capital

structure metrics.

Valuation Analysis

In order to conduct the valuation analysis two major valuation methods are

used: the method of comparables and the intrinsic models of valuation. The

intrinsic models of valuation are more accurate and reliable than the method of

comparables overall. Our team conducted the analysis based on the stock price on

April 1, 2016; its price at the moment was $34.66 per share. The method of

comparables consists of 8 different processes (shown in the following table) with


Debt to Equity Average Increasing

Times Interest Earned Underperforming Stable

Altman's Z-Score Underperforming Stable

Capital Structure Ratio Analysis


different factors to determine the price of the stock based on those components.

Overall, seven out of eight methods of comparables showed that B&G Foods’ stock

price was overvalued according to the method of comparables.

The intrinsic models of valuation account for a more accurate, detailed and

more reliable way to valuate a company. Four models of valuation were used in

B&G Foods’ valuation; the (1) discounted dividends, (2) free cash flow, (3) residual

income and (4) long run return on equity and the residual income perpetuity

model. When using the four intrinsic models the ability for error increases due to

the forecasted items. Overall all four models indicated an overvalued price of stock

per share similarly to the method of comparables.

However, the intrinsic models were more accurate regarding the price used

of 34.66 at the closing bell on April 1, 2016. This proves the theory that intrinsic

models are more accurate and reliable.

As Stated Restated

Trailing P/E Overvalued Overvalued

Forward P/E Overvalued Overvalued

Price to Book Overvalued Overvalued

Dividend to Price Overvalued --------------

P.E.G. Ratio Overvalued Overvalued

Price/EBITDA Overvalued Overvalued

Price/Free Cash Flows Undervalued --------------Enterprice Value/EBITDA Overvalued Overvalued

Overall Overvalued Overvalued

Method of Comparables


Company Overview

B&G Foods, Inc. is a parent holding company that operates as a

manufacturer, distributor, and seller of a variety of shelf-stable food products

under several recognized brand names. B&G Foods, along with its wholly owned

subsidiaries operates in the United States, Canada and Puerto Rico. B&G Foods

has been in business for over 125 years. The company originally started as a street

market in Manhattan, New York at the end of the 19th century under the

supervision of the Bloch & Guggenheimer families; that is where the actual name

is derived from (B&G). The company joined the New York Stock Exchange (NYSE)

on May 23, 2007 under the ticker “BGS,” the company is headquartered in

Parsippany, New Jersey, B&G Foods’ fiscal year ends on December 31, or the

Saturday closest. (B&G Foods 10-K.)

Business Products

According to B&G Foods the company holds 41 different food brands.

Ac’cent B&G B&M Baker’s Joy

Bear Creek Country Kitchens Brer Rabbit Canoleo

Cary’s Cream of Rice Cream of Wheat Devonsheer

Don Pepino Emeril’s Grandma’s Molasses

JJ Flats

Joan of Arc Las Palmas MacDonald’s Maple Grove Farms

Molly McButter Mrs. Dash New York Flatbreads

New York Style

Old London Original Tings Ortega Pirate’s Booty

Polaner Red Devil Regina Rickland Orchards


Sa-són Sclafani Smart Puffs Spring Tree

Sugar Twin Trappey’s TrueNorth Underwood

Vermont Maid Wright’s

Figure 1.1 B&G Foods’ subsidiaries (B&G Foods 2015 10-K)

B&G Foods specializes in producing shelf-stable food products. As described on

the company’s website profile, the range of foods produced by B&G Foods, Inc.

includes:

“Hot cereals, fruit spreads, canned meats and beans,

bagel chips, spices, seasonings, hot sauces, wine vinegar,

maple syrup, molasses, salad dressings, Mexican-style sauces,

dry soups, taco shells and kits, salsas, pickles, peppers,

tomato-based products, puffed corn and rice snacks, nut clusters,

Greek yogurt coated granola bars and bites, and other specialty products.”

Sales Volume & Growth

B&G Foods has been experiencing a positive increase in sales over the last

five fiscal years; the company’s sales have been increasing at a volatile growth

rate. From 2011 to 2012 sales surged from $543.87 million to $633.81 million

causing a 14% increase in growth rate compare to the period 2014-2015 that had

a small increase of just 2% due to slow market activity.


Year Sales in Millions Growth rate

2010 513.34 --

2011 543.87 6%

2012 633.81 14%

2013 724.97 13%

2014 848.02 15%

2015 862.19 2%

Figure 1.2 B&G Foods yearly sales – (B&G Foods 2015 10-k)

Figure 1.3 Volatility of growth rates with respect to sales

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

100

200

300

400

500

600

700

800

900

1000

2010 2011 2012 2013 2014 2015

Sales Volume & Growth

Sales Growth


Competitors

B&G Foods operates as a supplier in processed and packaged goods

industry, an industry that is characterized by the high degree of competition among

firms; moreover, the profit margin rarely exceeds above 30% (Food Industry

Costs, Profits, and Productivity.)

B&G Foods’ direct market competitors are (1) The J.M. Smucker Company

(SJM), (2) General Mills (GIS), Inc. and (3) The Seneca Food Corporation (SENEA).

B&G Foods’ competitors are subsidiaries holders similar to B&G Foods. All three

competitors offer a wide range of shelf-stable products very similar to those of

B&G Foods. Substitute products are extremely common within the food industry.

Nonetheless, food is the most basic product people consume, and the demand for

food and beverages continues to increase year after year because it is directly

linked to the growth rate of the population as a whole.

Industry: Processed and Packaged Goods

The Processed and Packaged Goods industry is a $4.4 trillion market that

will expand to $5.0 trillion in the following year (RTS Resources.) The processed

and packaged goods industry consists of enclosed food products, a variety of

different materials is used to enclose said products; ranging from plastic to

aluminum canning to preserve the goods for a long period of time. As previously

mentioned the processed and packaged goods industry is correlated to economic

growth, disposable income and population growth.


Market Capitalization of Firm

Firms are classified as either small, medium or large sized caps. A small-

sized firm has a market value of less than $2.0 Billion, a medium-sized firm has a

market value of more than $2.0 Billion but less than $10.0 Billion. Moreover, a

large-sized has a market value of more than $2.0 Billion but less than $10.0 Billion

(The Mutual Fund Store.) Based on the previous information, and by implementing

the market capitalization formula (Market Price per share x No. of Shares

Outstanding) B&G Foods is worth $2.04 Billion. Therefore, the company is

classified as a medium-sized cap.

Location

B&G Foods’ headquarters are located in Parsippany, New Jersey; the

company operates seven manufacturing facilities of which six are corporately

owned and only one is leased. B&G Foods’ seven manufacturing facilities serve as

warehouse/storage deposits as well.

As seen in the company’s latest “10-K” the manufacturing/warehouse

facilities, distribution centers, headquarters and the sales office (which is required

by “Wal-Mart” located in Bentonville, Arkansas) are located in the following cities.


Figure 1.4 B&G Foods facilities across the country – (B&G Foods 10-k)

Stock Performance

On May 23, 2007 B&G Foods conducted their Initial Public Offering (IPO)

with the New York Stock Exchange (NYSE). With an initial selling price of $13.60.

The company hit its lowest stock price of $2.56 on October 19, 2008 as a

consequence of the Subprime Mortgage Crisis. Nonetheless, the stock has

maintained an average growth rate of about 38.89% a year ever since 2008;

leading to the current price of $35.44.


Analyzing B&G Foods’ performance for the last five years indicates the yearly

growth rate that company has experienced. The company’s stock has increase in

price primarily because of their increased in sales year after year for the past five

years. The company’s stock traded at its highest historical price of $38.07 in the

last quarter of their fiscal year ending on November 25, 2015.

As illustrated in the graph below a steady growth rate can be observed regardless

of the price fluctuations in the stock in the last five years.

Figure 1.5 B&G Foods stock performance over the last five years – finance.yahoo/BGS


Industry Overview and Analysis (Five-Factor Model)

The Food Processing industry is a stable growing industry in the United

States. it is primarily based on, processing, manufacturing, and consumption of

agricultural commodities. A research by the USDA made in 2014, revealed that

14% of American households live with low food security. The food processing

industry tries to offer remedies to low household income by offering many sets of

relatively low foods products. Understanding this industry is a good foundation for

accessing the performance of any firm operating in the sector. The the Porter’s

Five Forces Model is the assessment tool that we will be using in order to describe

the characteristics of this industry.

Rivalry among existing firms (High)

• Threats to new Entrants (Low)

• Threats of substitue Products (low)

• Bargaining Power of consumers (medium)

• Bargaining power of suppliers (low)


Rivalry Among existing firms

The degree of rivalry among firms is the most viable scenario for an efficient

use of resources. The economic conditions of the US have shaped the food

processing industry as highly competitive sector. The industry is mainly Business

to Business, therefore firms need to battle to promote their products with whole

sellers and create healthy relationship with both distributors and suppliers. In their

2014 10-k under their competition section, B&G Foods one of the competitor in

the industry briefly explain the role of competition in their sector: “We face

competition in each of our product lines. Numerous brands and products compete

for shelf space and sales, with competition based primarily on product quality,

convenience, price, trade promotion, consumer promotion, brand recognition and

loyalty, customer service, advertising and other activities and the ability to identify

and satisfy emerging consumer preferences.” They talked about key success

factors that help a company stay in business in a very competitive industry.

This creates an environment where were no firm has a real advantage

resulting in low concentration, because no competitor is holding most of the

market share. All the competitors have a decent share in the market.

Switching cost

In the Food processing sector, the switching cost is relatively low, because

companies who charge higher price are most likely to be pushed out of the market

by customers purchasing competitors’ products of the same value at lower price.

The size of company in this industry is very important because it helps firms

increase their share of the market and reducing their costs (economy of scale).

Therefore, Companies need to be Efficient and effective to make profit.


Small companies are less likely to weaken bigger companies position in the short

run, but they are most likely to be acquired or absorb by with larger companies in

the long term. Merging and Acquiring give company a marketing advantage. Here

is a small selection of brand offered under the same companies (B&G Foods and

General Mills).

B&G Foods brands:” Certain of our brands, including Cream of Wheat,

Ac'cent, Crock Pot seasoning mixes, Underwood, Polaner, Static

Guard, Mrs. Dash, New York Style, Sugar Twin and Rickland Orchards…”

General Mills’ brands: ” Green Giant, Uncle Toby’s, Mountain High, el

Paso, Yoki, Häagen-Dazs, Pillsbury, Totino’s, Progresso, Green Giant, Yoplait

etc.”

By having different brand and products, companies take a step ahead

reducing the effect of switching cost.

In highly competitive industries often provides customers with a set of pretty

similar products, which is the case in this industry where companies have pretty

homogenous products (Low differentiation). It mainly causes the industry have

low differentiation. We’ve selected 4 firms in the industry, and we’ve found that in

all their 10-Ks, they all cited Wal-Mart as one of their most active buyers at roughly

22% of their sales on average.


percentage of sale by Wal-Mart

B&G Foods 19%

JM Smucker 27%

General Mills 21%

Kellogg 21%

average 22%

Which shows the level of competition in this industry is such that no

company has a real advantage over the other ones’. It also show that there is a

consistency in Walmart purchases of their products with.

Fixed Cost

As manufacturer, most of the fixed cost will come from Property plants and equipment’s

(warehouse, Machinery, land etc.).

PPE Total Assets PPE/TA

Kellogg 3,769 15,153 24.87%

B&G Foods 116 1649 7.04%

General Mils

3,783.30 21,964.50 17.22%

Average 16.38%


We created a table showing property, Plants, and equipment as a

percentage of Total assets in order to have a better assessment of the fixed costs.

We’ve learned that Net PPE represent on average 16.5% of total Assets with

intangible assets excluded. It shows that this industry relies on fixed costs to

reduce their productions costs while having a high level of output.

Variable costs will be mainly influence by the commodities market and his

fluctuations. The use of futures and forward contracts regarding commodities

comes very handy. In Kellogg 10-K for example, they state that:” The cost of such

commodities may fluctuate widely due to government policy and regulation,

weather conditions, climate change or other unforeseen circumstances.” How can

companies reduce risk from the commodities market? By locking a price in with

forward and futures contracts, companies can protect themselves from price

increase. Relationship with suppliers (contracts) is a big determinant of how

efficient a company is, because it helps control the risk from the commodities

market.

The exit barriers for the food industry are very reasonable exit costs. Most

of them comes from long term liabilities, intangible assets (Goodwill, copyrights

etc.) For example, Kellogg had approximately $5.9 Billions in long term liabilities,

Goodwill of 5.9 Billion and about $2.3 billions in intangible assets (Kellogg’ 2015

10-k page 39). Another example, General Mills had about $7.6 billions of long term

liabilities, Goodwill of $8.9Billions, and 4.7 of intangible Assets (general Mills’ 2015

10k page 53.) Those are components that make it, in those particular cases, a

relatively thoughtful process. It is important that the size of the company is

important, the bigger the company, the higher the exits barrier for those specific

companies.


Conclusion

The industry where B&G Foods operates is highly competitive. Companies

in this industry have competition in every product line. The industry has a low

concentration, meaning that all firms have no real advantages.

The switching cost is relatively low; it happens due to the inability of

suppliers to charge higher for the same goods. Otherwise, they would be pushed

out of the market since customers would simply purchase goods of other

companies. This leads us to the conclusion that this industry has a low

differentiation.

The fixed costs come primarily from the plants and equipment (warehouse,

machinery, land, etc.). The exit barriers for the food industry go in accordance

with the size of a company. Overall, we present affirm that this industry is

characterized by a high degree of competition.

Threats to New Entrant

In highly competitive industries, the level of threats to new entrants is relatively low,

because of the homogeneity of production throughout the industry. The size of a company often

determines how effectively the entrance of a new company in the market can affect the position

of existing companies. For example, B&G Food has a relatively good share in the US market ($1.7

Billion company) won’t really feel the presence of a new startup company in short run, but in the

long run the market “self-structured” which means the market adjust itself as the startup company

grows. The first mover advantage is low in this industry, but it is attainable through Research and

development (R&D). Companies in the industry are allocating budget in this sense with General

Mills spending $229millions in 2014, $199millions in 2014. New technologies to produce higher

quality products at lower cost for example, a company can differentiate itself for a short term,

but in the long term his competitors will have to update their resources to avoid lost sales.


The most difficult for new entrants will be contract with suppliers and platforms to display

their products, which can be very complicated for new entrants, how to increase their share? and

how does customers and distributors react to a new brand in a perfectly competitive industry?

Those are two questions that new entrants tend to answer throughout their business strategy

while entering the market.

The Food industry is a highly regulated industry due to the relationship between food and

health. Compliance to all those departments, government and agencies can make it a long process

for a new competitor to enter the market and to quickly compete effectively. In their 2015 10-K

B&G Foods makes statement about all the agencies that they need to comply to: “As a

manufacturer and marketer of food and household products, our operations are subject to

extensive regulation by the United States Food and Drug Administration (FDA), the United States

Department of Agriculture (USDA), the Federal Trade Commission (FTC), the Consumer Product

Safety … federal, state, local and foreign authorities. In addition, our meat processing operation

in Portland, Maine is subject to daily inspection by the USDA.” Which states the amount of

regulations in the Food processing industry.

Conclusion

Since the industry is highly competitive, the threats to new entrants is relatively low. The

main threats are the necessity to find platforms for product distribution and the logistics between

a supplier of raw materials and the marketplace. The industry is highly regulated, and Innovation

may help a company to earn economic profit, but in the long run every other competitor will

follow. The first mover advantage in the industry is not significant: First mover advantage is

relatively low.

Threats of substitute products

The treats to substitute represents the alternative products available to consumers that

are relatively capable of offering the same or really close amount of satisfaction. Their willingness

to switch often depends on the trade off from the evaluation of alternatives and the actual

product. In this industry, The Threats of substitute is relatively low, because it is commodity

based industry. There are few alternatives available to consumers. One would to produce


themselves what they will consumes as food, another one would be to take whatever is available.

A major discovery in R&D for example, could also create new products that could negatively affect

the demand for the Processed and packaged goods.

Consumers’ willingness is mainly based on price and incentives (coupon, discount, loyalty

program) that the market offers to make their products more appealing to consumers. One more

threat could be the decrease in price of healthy and organic food, with more and more awareness

in this sense, the healthy and organic interest group could possibly in the long-term represent a

serious threat to the processed food industry.

Conclusion

The threats of substitute products represent the alternatives available to the consumers that can

provide them with the same satisfaction. We found that a threat to substitutes will be the price

because it is a incentives for consumers to guide their consumption for specific products. In this

sense, the threat for substitutes products is actually low, because there is no actual alternative

beside consumers growing their own that can represent a direct threat to the processed food

industry.

Bargaining Power of Buyers

The buyers’ ability to drive price come from his ability to substitute products (low switching

cost) and influence firms’ revenues by decreasing sales is medium. Buyers are the core of any

business activities, therefore they play a huge role in the survival of businesses. Consumers could

influence the market by dragging the price low, thus reducing the profit margin of the firms. For

the Food industry, there is an interdependence between the consumers’ needs (primary need:

eat) and business opportunities. Which make this industry pretty stable and sustainable in long

run. For example, B&G Foods had an increase in sales in the United stated by 4.1% (2015 10-K

page 23). There will always be a demand for Food. There is an infinite consumer’s base, but

consumption processing food depends also on the geographic location of consumers.


Conclusion

Buyers have the ability to drive prices due to a variety of different suppliers and the low

potential switching costs between them. However, since there is always need for food, the buyers

still cannot push the reasonable degree of prices in this industry. There is a mutual interest

between the businesses, trying to make profits, and the consumers trying to feed themselves by

meeting their foods’ expectation. Overall the bargaining power of the buyers is medium, because

still considerable, but can definitely be overcome, because of the necessity of consumers to feed

themselves.

Bargaining Power of Suppliers

Looking at Supply chain, Suppliers play a major role in providing resources for businesses

to provide consumers with quality products. The decision of choosing a supplier is very important,

because the quality of your raw materials will affect the quality of the products produced. The

demand for food is slowly but very sustainably growing over the last years (Graph SALES

GROWTH).

In the Supplier side, the industry is very competitive, so it requires firms to have a large

amount of suppliers to try to reduce cost and most important reduce the risk of raw material

shortages. “The amount of bargaining power of suppliers can also be determined by their

geographic location. Which is very relevant in the effectiveness of companies’ supply chain, and

it can definitely reduce their production costs. “Kellogg in their 2015 10-K explains how they get

raw materials: “The principal ingredients in the products produced by us in the United States

include corn grits, wheat and wheat derivatives, potato flakes, oats, rice, cocoa and chocolate,

soybeans and soybean derivatives, various fruits, sweeteners, vegetable oils, dairy products,

eggs, and other filling ingredients, which are obtained from various sources.”

They produce some of their raw material in order to have better control on supplies.

The quality may vary from places to places. On this end, firms must maintain a certain

standard of quality in order to meet consumers’ expectations. For example, the beef produce in

Venezuela won’t necessarily have the same characteristics as the beef produce in West.


In a competitive market, a significant way by which businesses can hedge risk and improve

revenues is by being cost efficient while delivering the highest quality product possible. Those

are assessments needed for businesses to determine the choice of suppliers.

Accessing the number of suppliers in the market is nearly impossible to do, but Food

processing industry’s suppliers works in Associations, who mainly in the American continent, but

also internationally. The goal of those associations of suppliers is to facilitate connection between

food manufacturers and suppliers. For US industry those associations regroup suppliers from the

Americas mainly (Canada, Mexico, Puerto Rico etc.)

Conclusion

In this industry, there is a large amounts of suppliers, but companies can

also effectively grow (Commodities) their own raw materials, or even more

reasonably, produce and buy some of it just like Kellogg. On the other end, there

is a significant trade off that is largely influence by the business decisions of the

firm when deciding on which business strategy to use (Make or Buy). In this sector

of the food market, the bargaining power of suppliers is relatively low due to the

fact that companies might prefer the buying alternative because it gives more

variety of choice in term of quality, and more flexibility to switch from one supplier

to another one.

Conclusion

Finally, we can deduct that the Food and packaged good industry is a

competitive market that is characterized under the fives forces model by the

following aspects: low differentiation, low concentration, low threats to substitute,

medium bargaining powers of consumers, and finally low bargaining powers of

suppliers. there are relatively low barriers to entry. The first mover advantage

creates economic profit in the short run, not the long run. The barriers to exit are

medium due to some important usage properties, plant, and equipment needed


for the manufacturing process. Regardless of their importance in the business

activities, companies in the industry are price takers, most of the bargaining power

comes from consumers’ influence over the price, then Companies, and suppliers

comes last. Regardless of their importance in the business cycle of companies,

Suppliers bargaining remains low, because there are alternatives available on the

market weaken their influence in this industry.

Industry Sales and Growth

The industry sales and growth are analyzed based on the revenue of

companies in the processed and packaged goods industry. The data is obtained

from the 10-Ks of B&G Foods and their competitors.

In the following scatter graph, we evaluate the revenue of the four

companies (y-axis), in the last five years (x-axis). It is important to emphasize that

despite having much more sales in terms of value of the sold items, it does not

necessarily mean that one company is performing better than the other.

According to Yahoo! Finance, the main competitors of B&G Foods are

General Mills Inc. (GIS), The J. M. Smucker Company (SJM), and Kellogg.

The industry data is the average of these four firms.


Figure 1.6 Industry Sales

As we can see from the graph, B&G Foods is a small player in terms of actual

food sales. Their revenue from food sales in 2015 is equal to $966 millions of

dollars. B&G Foods’ main competitors have much higher sales, up to 18 times

larger than their own.

In the next chart, the growth of the sales in millions of dollars is presented

in percentages (y-axis) in the period of last four years (x-axis). The data is based

on the information from the 10-Ks of these companies.

2011 2012 2013 2014 2015

Kellogg 13200 14200 14800 14580 13530

The J.M. Smucker 4830 5530 5900 5610 5690

General Mills Inc. 14880 16660 17770 17910 17630

B&G Foods 544 634 725 848 966

Industry 8363 9256 9799 9737 9454

0

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4000

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14000

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ENU

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Figure 1.7 Sales Growth

It is a growing industry, and the data shows that in the past five years, the

sales have been growing with a period of stagnation between 2014 and 2015. On

the other hand, the B&G Foods demonstrates growing sales in the last four years.

These facts lead us to an optimistic view of the future developments of the B&G

Foods.

Market Capitalization

In this section, market capitalization is analyzed based on the data gathered

from Yahoo! Finance.Investors use market capitalization, also called as market

cap, to understand how big a company is, which is composed of the number of

outstanding shares times stock price.

2012 2013 2014 2015

Kellogg 7.58% 4.23% -1.49% -7.20%

The J.M. Smucker 14.49% 6.69% -4.92% 1.43%

General Mills Inc. 11.96% 6.66% 0.79% -1.56%

B&G Foods 16.54% 14.38% 16.97% 13.95%

Industry 10.67% 5.86% -0.63% -2.91%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%G

RO

WTH

IN %

SALES GROWTH


B&G Foods recently became a mid-cap company, having its market cap

equal to $2.73 billion dollars as of May 9th, 2016. In comparison with small cap

companies, mid-cap companies tend to generate lower returns with lower risk. It

means that the company shifted from its target investor group towards investors

that are more risk averse, i.e. people who prefer less risky investments.

Figure 1.8 Industry Market Cap

In terms of market capitalization, B&G Foods is the only mid-cap company.

The J. M. Smucker Company, Kellogg, and General Mills Inc. are all large-cap

companies, their market cap is bigger than $8 billion dollars. This data shows that

the competitors of B&G Foods tend to generate less returns bearing less risk, while

B&G Foods tends to generate higher returns bearing higher risk.

Conclusion

B&G Foods is clearly showing signs of a high operating efficiency. B&G Foods

has growing sales in an industry that is in a period of stagnation. Since the food

26540

15490

37290

2730

20513

0

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20000

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30000

35000

40000

Kellogg The J.M.Smucker

General MillsInc.

B&G Foods Industry

Mar

ket

Cap

ital

izat

ion

Industry Market Cap (in millions)


sales have increased in the past years. Based on the analyzed data, this company

has lower sales than their competitors. On the other hand, since their market

capitalization is less than the average, they tend to generate higher returns bearing

higher risks. B&G Foods has recently grown to a mid-cap company in February,

2016, their market capitalization reached $2 billion dollars in that month.

Analysis of Key Success Factors for Value Creation in the Industry

In the highly competitive processed and packaged goods industry, constant

value creation by firms is required to compete in the volatile global and regional

markets. There are many factors that contribute to the volatility of processed and

packaged goods industry markets and it is important to understand how effectively

managing these problems can create value. “Numerous brands and products

compete for shelf space and sales, with competition based primarily on product

quality, convenience, price, trade promotion, consumer promotion, brand

recognition and loyalty, customer service, advertising and other activities and the

ability to identify and satisfy emerging consumer preferences” (B&G Foods 10-K).

(Value creation is the performance of actions that increase the worth of goods,

services or even a business - Business Dictionary)

The following section will include a detailed analysis of specific value creating

strategies and how they directly impact the industry as a whole.

First Mover Advantage

With numerous firms competing in the processed and packaged goods

industry, value creation needs to be high enough to offset the fixed and variable

costs of implementing value creating strategies. Therefore, it is essential to not

only look at how a certain strategy might affect one area of the industry (such as


packaging), but also how it affects the overall economic strength (value) of the

industry. An example of this can be seen when analyzing how firms in the industry

adapt to trends in consumer tastes.

Over the past decade, consumer food trends have been rapidly evolving,

and PPFI firms have had to adapt accordingly. “Our success depends in part on

our ability to anticipate and offer products that appeal to the changing tastes,

dietary habits and product packaging preferences of consumers in the market

categories in which we compete” (B&G Foods 10-K). One such change can be seen

in consumers’ movement away from name brand foods to private label foods.

“These customers are also reducing their inventories and increasing their emphasis

on private label products” (B&G Foods 10-K). This change creates new niche

markets that allow firms to create new value adding goods. However, these new

goods need to be produced in a way that costs the firm less than the premium

that customers are willing to pay in a specific niche market.

Firms in the industry need to evaluate whether new products can create

enough value to outweigh the costs of introducing the new product to the niche

market. Successful implementation of new product introduction in niche markets

has created massive value for firms such as Chobani.

It is important to note however, that firms that initially introduce products

to a market niche typically find more value in their venture. This value adding

strategy is called the first mover advantage and has allowed many new firms to

enter the processed and packaged goods industry.

While it is harder for large companies to quickly adapt to new trends due to

specialized facilities with long production lines, small firms with relatively short


production lines can quickly adapt to trends and get their product to market first.

Big firms have had to adapt to this strategy by finding new ways to quickly

introduce products to market. They cannot construct a new facility in a timely

manner in order to capitalize on the first mover strategy, so most firms like General

Mills and B&G Foods Inc. have turned to the acquisition of firms exhibiting strong

first mover advantage value.

Diversified Products

Product diversification is essential for firms in the processed and packaged

goods industry that are seeking long term success. “Product diversification is a

process by which businesses attempt to expand their market reach and customer

base by delivering products somewhat different than the ones for which they are

known. These new products can simply be extensions of existing brands or they

may be entirely new. By engaging in product diversification, a company can extend

its business into new areas and markets, thereby increasing their opportunities for

profit” (Wise Geek).

For firms like B&G Foods, acquisitions are a value adding way to go about

diversifying their products. “A major part of our strategy is to grow through

acquisition” (B&G Foods 10-K). New niches in the processed and packaged goods

industry are repeatedly emerging and big firms with specialized facilities cannot

readily adapt to consumer tastes in a timely manner. These facilities are capable

of producing a wide range of related products, but struggle with highly diversified

products. Therefore, these big firms turn to small, highly specialized firms easily

capable of producing desired goods.


Buying out a small firm does not require a substantial amount of capital

allowing diversification against risk. The niches that show a positive growth attract

additional investments from the parental companies. If firms decided to take on

the diversification themselves, the main brand/company (Coca-Cola producing all

of its products under the Coca-Cola name) could be damaged by the potential

failure of the subsidiaries, thus increasing the risk of the venture.

Lower-Input Costs

It’s not always valuable to acquire a firm, however. It is more profitable in

some instances, to expand existing facilities within the main company. “We

regularly evaluate our co-packing arrangements to ensure the most cost-effective

manufacturing of our products and to utilize company-owned manufacturing

facilities most effectively” (B&G Foods 10-K). Such is the case with General Mills

and their cereal production. General Mills produces a number of cereals with similar

production processes. General Mills’ factories are capable of handling multiple

cereals by implementing machines that are capable of different functions. In this

case, it is much cheaper, and thus value adding to invest in an adaptable

production line than to go out and acquire a company that is capable of a specific

function.

As stated in the paragraph above, General Mills adopts such a strategy by

making sure that its cereal producing factories are able to meet the needs of future

consumer trends in cereal. With 12 different cereals, General Mills is able to

efficiently produce a large portion of their cereals without having to heavily modify

its existing infrastructure. Furthermore, new cereals will be introduced down the

line with relatively little startup costs due to factories that are able to handle a

wide-range of cereals.


Supply contracts are also necessary for keeping a low input cost.

“Supply contracts are types of contracts that establish the terms of a

working relationship between a vendor and a customer. A supply contract

is often necessary in order to lock in discounted pricing and other benefits

that the supplier is agreeing to provide to the client for a specific period of

time” (Wise Geek).

With an agreed upon discounted price, firms in the industry can produce

their products at a low, stable price. This strategy is particularly valuable when

commodity prices are increasing (currently they are) because it allows firms to pay

a low price for a set period of time regardless of the current market prices , thus

adding value to the firm. If costs are unexpectedly driven down, firms can

renegotiate, as long as the supplier is willing, the price down to meet future

expectations.

Regardless of the volatility of commodity markets in which firms in the

industry participate in, supply contracts provide relative stability to future costs

incurred by the firm. “Vegetables for the Green Giant brand are primarily purchased

under dedicated acreage supply contracts from a number of growers prior to each

growing season with the remaining demand being sourced directly from third

parties. We purchase certain other agricultural raw materials in bulk or pursuant

to short-term supply contracts” (B&G Foods 10-K). This can be particularly useful

when gauging how to allocate funds in the future. With this being said, suppliers

can set the terms to the contract as easily as firms can. This is especially true

when firms are supplier dependent. Supplier dependent means to rely heavily or

entirely on one supplier to supply the good a firm needs to produce its goods.

Suppliers in this instance can use this to their advantage by requiring higher


payments for their goods. Therefore, it is also value adding to ensure that a firm

is not supplier dependent.

Retailer Relations

In the processed and packaged goods industry, most firms do not sell their

products directly to individual consumers. It is very difficult for processed and

packaged goods firms to directly sell their products to individual consumers since

they produce in bulk quantities. Instead they sell to retailers such as Walmart.

Maintaining a good relationship with retailers is key if firms in the industry want to

distribute their products in sizeable volumes.

“In the past decade, the retail side of the food industry has seen a continuing

shift of sales to alternate food outlets such as supercenters, warehouse clubs,

dollar stores and drug stores”(B&G Foods 10-K).

All firms in the industry are price takers meaning that whatever retailers are

willing to pay for the goods is what suppliers can sell those goods for. Despite this,

if retailers are unwilling to buy the goods, suppliers will have a large stock of

expiring food in its inventory. Delivering products on time and ensuring quality are

some value adding ways firms in the industry can maintain good relations with

retailers.

Good relations are not important however, if a product is not selling.

Regardless of how favorable a firm is, a retailer will not sell an inferior good. Firms

in the industry need to ensure the quality of their products through buyback

programs. A buyback program is a guarantee on the quality of products sold to a

retailer. Products that are inferior can be shipped back to the supplier for a refund.

Regardless of quality, a product’s sales might dip in certain conditions.


To offset this, firms can implement a promotional program to save individual

consumers money and compensate the retailors for the loss through trade sales

promotions or some other means. “Our marketing organization is aligned by brand

and is responsible for the strategic planning for each of our brands. We focus on

deploying promotional dollars where we believe the spending will have the greatest

impact on sales” (B&G Foods 10-K). A value seeking firm should only implement a

promotional program if the firm believes the dip in demand or increase in

competition is only short term. It should not be used as a permanent fix to an

underselling product.

Brand Awareness

Product identification is important in how a certain product will sell. For

example, for products that list “value brand” on them consumers will immediately

identify the product as relatively cheap and of low quality. “Value brand” products

will attract those customers who value price over quality. “Our marketing

organization is aligned by brand and is responsible for the strategic planning for

each of our brands. We focus on deploying promotional dollars where we believe

the spending will have the greatest impact on sales” (B&G Foods 10-K). Therefore

it is important to know how to market a specific product in order to draw in the

target customer.

With many PPFI firms this problem becomes increasingly more complex.

Different products need to reach a different audience without conflicting with each

other. What we mean by this is if a company sells a “value brand” of a certain

category of food, they need to make sure any future endeavors into the category

target a different type of customer. Any conflict could potentially create additional


competition and thus lower sales. Correctly implementing a strategy where a PPFI

firms products can reach a wide range of customers is value adding.

Advertising is a key component to a brand’s image and appeal to customers.

Advertising can dramatically change how a product is received. “Our sales strategy

is centered on individual brands. We allocate promotional spending for each of our

brands and our regional sales managers coordinate promotions with customers.

Additionally, our marketing department works in conjunction with the sales

department to coordinate special account activities and marketing support, such

as couponing, public relations and media advertising” (B&G Foods 10-K).

With effective advertising, it is possible to increase a customer base for a

product by relating to a wide range of consumers. Effective advertising can also

relay to consumers why your product is unique from other products. With effective

advertising, firms in the industry can attract new consumers and stimulate

increased demand for their products thus adding value.

Conclusion

There are many ways to potentially add value to a firm. However, poor

implementation can result in a loss of value as with any strategy. It is crucial that

a firm looks at its available options and considers total firm impact to evaluate

whether a strategy is truly value adding. In many cases, in order to outperform

the market a company needs to make a strategy in a unique, efficient way.

Therefore, when valuing a firm it is crucial to look at a strategy’s efficiency and

implementation to find an accurate way of adding value. Only then can we truly

get a good idea of how much value is being added to the firm.


Competitive Advantage

Due to the large number of competitors present in the the processed and

packaged goods industry, it is increasingly important to achieve significant

competitive advantages over other firms. Some of the aspects B&G Foods focuses

on that create these competitive advantages include, economies of scale,

economies of scope, low cost distribution, and competitive pricing. One of B&G

Foods’ most valuable competitive advantages is low pricing without compromising

quality of the product, or shelf life. Product preservation is something that B&G

Foods is able to specialize in due to their respective economies of scale, and

economies of scope, within every product line. Through the use of these methods,

B&G Foods is able to achieve a competitive advantage that will be shown in detail

throughout the following sections.

Cost Leadership

As seen throughout the food industry, competitive pricing is essential to

success among competing firms. An effective pricing/cost strategy employed by

B&G Foods to compete with larger firms within the industry, that may be able to

achieve lower production costs, is to search for firms with which B&G Foods may

reach a contractual agreement with to manufacture, and package products at a

reduced cost.

“In addition to our own manufacturing facilities, we source a significant

portion of our products under ‘co-packing’ arrangements, a common

industry practice in which manufacturing is outsourced to other companies.

We regularly evaluate our co-packing arrangements to ensure the most cost-


effective manufacturing of our products and to utilize company-owned

manufacturing facilities most effectively.” (B&G Foods 10-K)

This cost strategy is essential to B&G Foods’ competitive pricing abilities,

and their market position in the food industry. Another cost leadership approach

B&G Foods implements, is the purchase of raw materials in bulk from wholesale

distributors ranging from agriculture producers, to companies specializing in

wholesale shipping and packaging materials such as cardboard, glass jars, etc.

Due to potential fluctuations in factors affecting the input prices of these raw

material suppliers, B&G Foods primarily focuses on establishing short-term

contracts to minimize cost volatility risk from said wholesalers, and maintain a

profitable contract with each respectively.

Economies of Scale and Scope

Although B&G Foods is considered one of the smaller companies operating

within the food industry, it effectively achieves both economies of scale and scope

through various different means. As previously discussed, B&G Foods relies heavily

on their contractual agreements with large manufacturers to obtain significant

profit margins on their products, essentially creating economies of scale that would

otherwise be unattainable to a firm of it’s size. In 2015 B&G Foods reported total

assets of $1.6 billion dollars, which is relatively small in the processed and

packaged goods industry. However, despite it’s small market share within the

industry, B&G Foods has established significant economies of scope in their

product lines. These economies of scope have been attained by B&G Foods

through the diversification of their product lines, and the use of existing

manufacturing facilities to produce these expansions within each product line.


Efficient Production

Efficient production is something that B&G Foods bases their entire

manufacturing process around, sticking to what their facilities are efficiently

capable of, and outsourcing the rest to the lowest cost manufacturer. Their

constant evaluation of profitability among the outsourced manufacturing insures

that they are operating at the lowest cost available and limits overhead costs to a

minimum.

“During the past three years, our cost saving measures and sales price

increases have substantially offset increases to our raw material, ingredient,

and packaging costs.” (B&G Foods 10K)

An attest to this statement is observed in B&G Foods’ constant research of

competing costs and pricing currently available.

Low-Cost Distribution

The distribution costs associated with the products manufactured by B&G

Foods are partially incurred by our wholesale customers such as Walmart, which

provide an access to their respective economies of scale and reduced costs. Due

to the nature of the industry in which B&G Foods operates, the distribution costs

related to the output of their products are directly related to the resources available

to the retailer which they sell to. Thus, B&G Foods’ primary concern when

considering potential wholesale customers, is to what extent customers can

facilitate distribution and minimize costs of transportation.


Inventory

Turnover

2011 2012 2013 2014 2015

B&G Foods 4.30 4.57 4.76 5.63 2.16

Kellogg 7.11 6.42 6.96 7.44 7.08

J.M.

Smucker

3.51 3.83 4.09 3.84 3.20

General

Mills Inc.

5.55 7.18 7.34 7.40 7.58

Figure 1.9 Inventory Turnover Table

There is an industry trend for inventory turnover values between 5-6 with

Kellogg having the highest throughout all periods. B&G Foods has one of the lowest

inventory turnovers in the industry with a decreasing value recently. This is an

indication that B&G Foods would benefit from an increase in inventory efficiency

in order to reduce costs and compete with firms within the processed and

packaged food industry.

Conclusion

B&G Foods has used several competitive advantages within their industry to

strategically position themselves and establish their market share. Their market

share, through the use of economies of scale, economies of scope, and low cost

distribution is one that is continually growing yearly. By simplifying product design,

lowering distribution costs, minimizing input costs, and manufacturing at the

highest efficiency possible, B&G Foods has achieved competitive advantages that


would otherwise be unattainable for firms of their size. Although B&G Foods is a

mid-sized competitor in the processed and packaged goods industry, their use of

competitive advantages has provided increased growth of their market share.

Accounting Analysis When a company lists shares of their corporation through an initial public

offering, they become subjected to the rules and regulations of the Securities and

Exchange Commission (SEC). These regulations mandate the public accessibility

of financial information concerning the daily operations of each firm. This

monitoring is essential to protect shareholders of all firms from receiving

information that may be misrepresented by the issuing firm in order to maximize

their stock value.

As previously discussed, firms must effectively leverage their use of the key

success factors they possess within the packaged and processed food industry in

order to further develop a competitive advantage in the market. When evaluating

financial statements released by a firm, it is important to understand the level of

disclosure implemented by the firm in order to identify any potential overstated or

understated occurrences. Even firms that are in compliance with Generally

Accepted Accounting Principles (GAAP) must be analyzed further in order to

determine the true value of the firm.

The degree to which firms release financial information apart from what is

required by GAAP varies from industry to industry, this is known as the firms

accounting strategy. The quality of the information which the firm may or may not

release is significant due to the consequential effect it may have to investors if it

is misstated. This is one of the primary reasons that firms must maintain a certain


level of transparency in their documents in order to instill trust in the shareholders

and provide them with the relevant information needed to make quality investment

decisions.

The accounting analysis process contains several steps in order to

accumulate, analyze, and interpret data correctly. Some factors which must be

constantly considered are the accuracy of the information released by the firm and

the form which they released it in. These factors dictate how useful the information

is to a current shareholder or potential investor. If any significant financial

information contained in the document the firms release is misstated or otherwise

faulty, it may negatively impact shareholders and is thus considered a red flag. In

the following sections we will discuss in further detail this accounting analysis

process and how to interpret and potentially restate this information in a manner

that may prove to be ultimately more informative.

Key Accounting Policies

In order to complete a successful accounting analysis, a firm’s key

accounting policies must first be identified. These policies vary from company to

company even within the same industry, this is in part due to the significance of

said policies. Although every firm must comply with the United States Generally

Accepted Accounting Principles (GAAP), the policies they wish to employ while

doing so are chosen by the firm. Sometimes firms may present some of their

financials in a way that may produce an over-optimistic representation of their

financials, thus it is important to review these key accounting policies in order to

develop a more accurate and objective understanding of the firm’s financial

performance.


Type One Key Accounting Policies

Type one accounting policies describe how a firm uses key success factors

to separate themselves from other firms within their industry and gain a

competitive advantage. How a firm develops a way to make their service unique

and provide value for their customers is called differentiation. There are several

ways that firms can stand out from their competitors, some of the methods include

product quality and variety, and cost leadership. In the processed and packaged

food industry differentiation is essential to remain competitive and retain

customers.

Cost Leadership

Reducing costs is an important part of any industry however, within the

packaged and processed food industry it is essential to stay competitive. There are

several ways which a firm can achieve cost leadership and they include low

distribution costs, economies of scale and efficient operations. When a company

expands its production capabilities or begins to see an increase in sales volume,

they may have a marginally reduced cost per item due to the constant overhead

expense and increased production, this is known as economies of scale. Another

way that a company may achieve economies of scale is through contractual

agreements with other larger companies to produce and manufacture products for

them at a rate that is lower than if the same volume were to be produced using

the own firms’ facilities. This production outsourcing is one of B&G Foods’ primary

key success factors which gives them a significant competitive advantage over

their direct competitors.


Within the processed and packaged food industry there are more than

30,000 competing suppliers to retailers which consequently leads the industry to

be price-takers rather than price-setters. Due to this increased competition,

retailers are able to leverage their bargaining power to select only the firms which

provide them with the cheapest costs or the largest profit margin. This forces

suppliers to maximize cost efficiencies in the manufacturing and distribution areas

in order to stay competitive.

Product Quality and Variety

Within the processed and packaged food industry there are many substitutes

for products among firms. Therefore, it is essential for firms to produce a variety

of options for the products they manufacture. B&G Foods has a wide variety of

high quality products food items within each of their product lines making them

one of the more diversified firms in the industry. Furthermore, when it comes to

products in the processed and packaged food industry, customers demand a high

quality at a reasonable price. B&G Foods provides customers with high quality

products through the use of contractual agreements with the industry’s leading

suppliers.

Although B&G Foods’ benchmark competitors strive to provide high variety

in their product lines, they often do so at the expense of quality. Differentiation

through quality is something which B&G Foods exemplifies through the use of

higher quality ingredients. Although there are cheaper alternatives to products

within B&G Foods’ manufacturing lines, they are able to entice customers through

this quality differentiation to other firms in the industry.


Type Two Key Accounting Policies

The way in which companies present their financial statements is considered

to be their type two accounting policies. These policies policies allow businesses

to report their financial statements in several different ways which can often lead

to a distorted presentation of their financials. Therefore, these accounting policies

must be examined in further detail in order to develop an objective understanding

of the firm’s financial performance.

These types of accounting policies are directly related to the firm’s reporting

of research and development expenses along with goodwill amortization. Although

the way in which a firm reports these elements of their financial statements is

legal, it is important to understand them to gain a clear knowledge of their

financials.

Research and Development

When considering Research and Development (R&D) in the processed and

packaged food industry, it is important to note the impact these expenses have on

the firm’s financial documents. In order for firms to be in compliance with GAAP

regulations they must expense the costs they incur relating to R&D in the year

which they were incurred. Consequently, firms who invest heavily in R&D may

report an income statement in which their expenses are overstated leading to an

overstatement in net income and equity on the balance sheet.

In that case a restatement of these expenses would present a more transparent

view of the impact that R&D expenses have on potential future profit. In the case

of B&G Foods, they list no R&D expenses meaning that there is no need for a

restatement because the firm does not allocate any funds to the activity


Goodwill

Goodwill is considered to be a form of an intangible asset which provides

value for the company during mergers and acquisitions. When goodwill is

expensed it reduces the value of the company assets and consequently many

companies often exclude any capitalized goodwill from their financial statements.

This is a very significant accounting strategy to consider when evaluating a firm

because it can be manipulated into presenting an overstated asset balance to show

a more positive company performance. Below in Figure 2-5 the goodwill listed on

B&G Foods annual reports is listed along with their respective PP&E, and total

assets.

B&G Foods Goodwill

(thousands) 2011 2012 2013 2014 2015

Goodwill 263,000 267,940 319,292 370,424 TBA

PP&E 92,000 104,746 110,374 116,197 TBA

Total Assets 1,133,000 1,192,000 1,484,343 1,649,353 TBA

Figure 2.1 B&G Foods Goodwill

Considering the fact that annual goodwill is a much greater than the net

amount of fixed assets for B&G Foods, it is evident that their intangible assets are

larger than their PP&E. This indicates that after capitalizing the goodwill with a

lifespan of five years the total assets will be decreased substantially. The

restatement of their goodwill will present a more accurate representation of B&G

Foods’s assets and thus a more accurate representation of the firm’s value.


Assessing Key Accounting Policies

The assessment of how management handles accounting policies deals with

how each key accounting policy is implemented and how it alters the valuation of

the company. Management is required to abide by GAAP’s rules, however, GAAP

allows for some estimates to be made. When numerous estimates are made to

portray bad financials as good financials, the valuation of a company can drastically

change.

Accounting Strategy

When deciding on an accounting strategy, management has to decide how

much it will disclose and how to estimate those disclosed numbers. When doing

so, it is important to look at competitors in the industry. Shareholders could

potentially be turned away if there isn’t enough relevant data on financials.

Regardless of whether a firm decides to disclose additional information, all

reporting firms must abide by GAAP’s mandatory minimums. A firm that fails to

meet these minimums (for financials intended to be released to the public) is at

risk of facing sanctions from the SEC. In reporting financials, some areas of

financials have more flexibility than others such as goodwill. It is management’s

role to determine how this flexibility will be used. This is where key accounting

policies (KAP) and key success factors come into play. The decisions made by

management related to KAP determine how net income will be stated. The KAP’s

for B&G Foods include goodwill, pension benefits, and the amortization of

intangible assets.


Accounting for Goodwill

Acquisitions make up a significant competitive advantage held by B&G

Foods. B&G Foods use acquisitions to ensure that their product line is differentiated

while hedging against volatility risk in new niche markets. Acquisitions can be sold

for premiums meaning that the price paid is in excess of the tangible assets.

Goodwill makes up the intangible asset side of a business that should justify the

premium paid.

Figure 2.2 – Acquisitions and Goodwill in 2015

Goodwill is an asset that is stated on the balance sheet. Goodwill has an

indefinite life, but is checked annually for impairment. When goodwill is impaired,

it means that the competitive advantage behind the goodwill has lost some (or all)

of its value. Firms are given some flexibility when deciding how much goodwill to

assign to a given competitive advantage and how that goodwill is impaired. This

can drastically affect the assets of an acquired company. As seen in figure 2.6,

goodwill dramatically affected the values of the acquired firms. This goodwill when

acquired is then added on to the acquiring company’s goodwill.

Mama Mary’s Acquisition: 2015 Specialty Brands Acquisition: 2015

Totals in thousands Totals in thousands

Purchase Price $51,025 Purchase Price $154,277

Goodwll $17,455 Goodwill $49,017

Amortized Intagible Assets $4,800 Amortized Intagible Assets

Unamortized Intangible Asset $38,000 Unamortized Intangible Assets $4,800


Figure 2.3 – Goodwill to Total Assets ratios

According to figure 2.7, B&G Foods has a high goodwill to total assets

(GW/TA) ratio indicating that they could be over paying for their acquisitions. We

think, that because their GW/TA ratio is substantial, B&G Foods is optimistic when

valuing goodwill. Furthermore, by providing recent acquisition data as seen in

figure 2.7, B&G Foods shows it is continuing to inaccurately gauge the value of

goodwill. We believe that B&G Foods is inaccurately portraying its goodwill leading

to a less accurate representation of assets and net income.

Accounting for Pension Liabilities

Pension plans come in two forms, defined benefit and defined contribution.

A defined benefit pension plan entails the company promising a set amount of

money when an employee retires. Defined benefit plans can dramatically affect

the financials of a company as the company is obligated to pay them. In the case

of B&G Foods, defined benefit pension plans make up a significant amount of debt

(around $3,000,000 a year). Currently, B&G Foods’ defined benefit plans are

critically underfunded and are considered in the ‘Red Zone’.

“We were notified that for the plan year beginning January 1, 2012, the

plan was in critical status and classified in the Red Zone. As of the date of the

accompanying audited consolidated financial statements, the plan remains in

Goodwill/Total Assets 2011 2012 2013 2014 2015

B&G Foods 23.0% 23.1% 22.4% 22.5% 22.0%

General Mills 36.1% 38.8% 38.1% 40.4% 37.4%

J.M. Smucker 33.4% 33.5% 33.8% 34.2% 36.1%

Seneca Foods 3.2% 3.9% 4.2% 4.4% 3.4%

Average GW/TA ratio 23.9% 24.8% 24.6% 25.4% 24.7%


critical status” (B&G Foods 10-K). This entails that B&G Foods did not allocate

funds effectively to keep up with the growth rate of the plan’s obligations.

Management has the ability to decide what discount rate to use when

valuing pension plans as well as the growth rate for funds in the plan. “Our

discount rate assumption for our three defined benefit plans changed from 3.882%

at January 3, 2015 to 4.225% at January 2, 2016” (B&G Foods 10-K). In order to

pay the pension liabilities, the funds growth rate must exceed the discount rate.

“The general investment objective of each of the pension plans is to grow the plan

assets in relation to the plan liabilities while prudently managing the risk of a

decrease in the plan's assets relative to those liabilities” (B&G Foods).

Due to management’s poor observation of the fund, the discount rate is

above the growth rate which has resulted in an underfunded plan. We believe B&G

Foods has understated its liabilities and has thus overstated its net income.

Accounting for Intangible Assets

Intangible assets are composed of non-physical assets that a firm owns.

This includes trademarks, customer accounts, patents, and so on. In the case of

B&G Foods, customer accounts make up a significant amount of amortizable

intangible assets. When deciding how to amortize intangible assets, management

can amortize in such a way that intangibles can be over or under stated.

Amortization Rate of Intangible Assets

(amount amortized over the year/total value) 2011 2012 2013 2014 2015

B&G Foods 3.44% 3.54% 3.62% 3.74% 3.85%

General Mills 12.39% 11.51% 11.72% 9.75% 9.60%

J.M. Smucker 2.45% 2.76% 3.13% 8.35% 7.02%

Seneca Foods 5.44% 6.01% 6.35% 6.26% 6.52%

Average Amortization Rate 5.93% 5.96% 6.21% 7.02% 6.75%


Figure 2.4 – Amortization rate of intangible assets

As seen in figure 2.8, B&G Foods has a much lower amortization rate than

the average, meaning that B&G Foods believes their intangibles, namely customer

accounts, have a longer useful life than other firms in the industry. This means

that B&G Foods expects to continue to sell profitably to its customers longer than

the industry does. We believe that B&G Foods is using too low of an amortization

rate for their intangibles and are thus overstating their assets and understating

their expenses.

Conclusion

B&G Foods has estimated their financials in a way that makes the company

look better than it is. With pension liabilities and amortization of intangibles, B&G

Foods has overstated their assets, understated their liabilities, and understated

their expenses. Goodwill was accurately stated and thus does not cancel out any

of the previous items.

Evaluate Accounting Strategy

B&G Foods’ accounting strategy is similar to their competitors in the

processed and packaged goods industry such as General Mills, The J. M. Smucker

Company, and Seneca Foods Corporation. As any other companies, they have to

follow the generally accepted accounting principles (GAAP). Since accounting

strategies affect financial reports, firms can use it to hide or exaggerate their actual

performance. Therefore, it is significant to evaluate their accounting strategies.

In comparison to the competitors, B&G Foods provides with the most

detailed 10-Ks. B&G Foods reports their financial statements with a high disclosure

policy. They have broad and open reports that clearly show what they do. B&G


Foods reports their information beyond what is required. Transparent statements

allow analysts to gather a complete and more precise picture of a company.

Therefore, this company has a high disclosure policy.According to B&G Foods 2015

Form 10-K, there have not been any major changes in accounting policies in the

last five years.

Even though B&G Foods has not indicated their spending on research and

development, it is clear that a small portion is set to satisfy changing needs of their

customer base. We also assume that B&G Foods spends a significant portion on

their marketing methods; it is a common strategy for brand-building in the

processed and packaged goods industry.

Research and Development

Since B&G Foods reports in accordance with the GAAP, there is almost no

flexibility for the company due to the fact that GAAP requires research and

development to be expensed as soon as it appears.

One of the most recent R&D advancements is the purchase of the Green

Giant, a subsidiary of General Mills, Inc. Along with the new brand-image, the

purchase also provided B&G Foods with R&D of the Green Giant. That is based on

the fact that the company was fully acquired by B&G Foods.

Goodwill and Intangibles

The goodwill of B&G Foods is significantly lower than their main competitors

as seen from the following table.


Figure 2.5 Goodwill

When working with goodwill, B&G Foods adopted SFAS No. 142, “Goodwill

and Intangible Assets.” Therefore, there is no amortization of the goodwill. In the

same time, there is still an annual test for the impairment without the adjustments

of the carrying value’s goodwill.

Capital vs Operating Leases

Due to the nature of the following two types of leases, it is possible to adjust

the balance sheet due to the accounting flexibility.

There are two different ways for the leases: operating or capital. There is a

different approach in reporting each of them. Capital leases are capitalized and

displayed on the balance sheet, while operating leases are treated as rent or use;

2011 2012 2013 2014 2015

Kellogg 3620 5050 5050 4970 4970

The J.M. Smucker 2810 3050 3050 3100 6010

General Mills Inc. 6750 8180 8620 8650 8870

B&G Foods 263 268 319 370 473

Industry 3361 4137 4260 4273 5081

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Go

od

will

in m

illio

ns

Goodwill (in millions)


therefore, they are excluded from the balance sheet. Since operating leases reduce

liabilities, it is advised to work with operating leases.

Figure 2.6 Operating Leases

According to the 10-K of the B&G Foods, they project their operating leases

to decrease in the future.

Currency Exchange and Commodity Risk

Since the higher risk means the higher possible return, if a firm is able to

minimize risk for the same expected return, it would greatly increase the overall

profitability. As discussed in the previous sections, the higher market cap the less

return on equity it generates and the lower risks a firm takes. Since B&G Foods is

a mid cap company, having their market cap a little bit above two billion dollars,

this firm takes average risk in the processed and packaged goods industry.

One of the common methods to decrease riskiness of a business is through

the use of hedging; this applies not only to the processed and packaged goods

industry, but to many other industries as well.

In order to decrease the riskiness, B&G Foods uses the same methods as

their competitors, it hedges in commodity prices and currency exchange. It allows


to protect the company from market downturns. B&G Foods makes transactions

in multiple currencies and different types of contracts.

B&G Foods also deals with futures and forwards to decrease inflation and

riskiness. This method uses two different periods of transaction time, one is at the

time of purchase and another is at the time of the transaction.

According to their 10-K, B&G Foods manufactures, sells, and distributes their

portfolio of products not only in the United States, but also in Canada and Puerto

Rico. Their foreign sales are primarily to customers located in Canada. B&G Foods

has 6.7% of their net sales in foreign countries.

Conclusion

B&G Foods follows the generally accepted accounting policies. The company

truly has a high disclosure policy. Their reports cover information that goes beyond

what is required and provide analysts with a clear picture of the company.

Although, there is a tendency not to include details about the research and

development expenses in the processed and packaged goods industry.

Goodwill, intangibles, currency exchange, commodity risk, capital leases,

and operating leases provide with some flexibility for the companies in the industry

to adjust their reports towards their goals. On the other hand, there is no flexibility

by manipulating R&D.

The B&G Foods reports their financial documents passively. They still have

not posted their annual report for the 2015, while their main competitors have

already done so. Regarding their previous annual reports, B&G Foods has always

provided with the analysts with clear explanations, graphs, and multiple bullet


points that emphasize the data. After careful analysis, we believe that the data

provided by B&G Foods is accurate.

Quality of Disclosure

The quality of disclosure of a company is a very important aspect of

communication. It often determines the company’s credibility and will to make

analysts’ job less difficult. Quality disclosure helps the public to understand,

evaluate, and assess companies’ performances. Based on historical information, a

company disclosure can in this prospective influence investors’ decision making.

Providing truthful and clear information gives people that are not necessarily

familiar with financial reporting, a fair interpretation on a company’s credibility,

transparency, long term vision and performances.

We will evaluate B&G Foods financial to reconcile how well they

communicate about their financial activities. All the publically traded companies

are required to report information according to the Generally Accepted Accounting

Principles GAAP. Having companies reporting under same standards (GAAP)

facilitates benchmarking and the people’ ability to verify the accuracy of the

disclosed information. Managers often have motives to improve company

performance by making the financials look better than what it actually is.

Consequently, creditors, investors, and even people will be misled by lack of

transparency to show the exact situation of the company. B&G Foods does a good

job in their 10-K, more precisely in the sales section, where the give a presentation

of revenues by brand see figure below.


Figure 2.7 Company sales in the past 3 years

In the Figure 2.7, B&G Foods breaks down all the sales by brand which give

analysts the opportunity to evaluate what particular brands generate the most

revenues. It helps assess the source of revenues and their contribution to the

company on a brand basis.


Internal and External Control:

In the B&G Foods annual report, they dedicate a section to control and

procedures. In this part of their 10-K, they deal with internal control where

managers and officers are in charge of maintaining adequate control over

financials and verify the financials’ effectiveness. B&G Foods auditing is done by

KKPMG LLC, one of the big four accounting firm. It is a well-known firm in the

accounting. The fact that they present them it is a plus for investors, because

KPMG’s credibility gives an assurance of a minimum fairness and transparency in

the financials. In case of misstatements at the internal level, the chief executive

officer and chief financial officer are in charge for all the consolidations and errors.

The balance between internal and external control is very important, in the way

that it increases the financials’ accuracy and reduces the margin of errors. The

goal is to give to investors a clear and accurate view about the financial condition

of the firm.

Fair Value vs. Carrying Value

The principle of fair value vs carrying value is an important principle of

accounting estimates that helps evaluate financials of any company. Carrying value

is the value that companies hold on their balance sheet. It is usually obtained by

subtracting depreciation, and put the assets value up to date. Fair value on the

other end is the value if the asset was sold on the open market. In B&G Foods’

10-K, they use carrying value for their current assets:

“Cash and cash equivalents, trade accounts receivable, income tax

receivable, trade accounts payable, accrued expenses and dividends payable are

reflected on our consolidated balance sheets at carrying value, which approximates


fair value due to the short-term nature of these instruments (10-K Item 7-

Qualitative Disclosure about Market Risk).” They affirm using carrying value only

for current assets and liabilities, because of they are short-term and have a limited

exposure to market risk.

While, further in their 10-K, they talked about why they use fair value: “Our

principal market risks are exposure to changes in commodity prices, interest rates

on borrowings and foreign currency exchange rates and market fluctuation risks

related to our defined benefit pension plans (10-K Item 7).” In this part, they use

fair value for risk’s reduction purposes (Market risks, foreign currency risk, and

inflation risk et.) because of the long term nature of some assets and liabilities, it

increases risk. So, the complexity of the fair value estimate makes it more and

more difficult for analysts to determinate the accuracy of their estimation.

Even further, the fact that they use different estimate for different elements

in the balance sheet makes it even harder for analysts to consolidate their

observations with the information available in the annual report. So, there is a lack

of harmony, because the carrying value calculation is pretty exact and easy to

consolidate on one end, and the fair value is a very complex estimate difficult to

verify on the other end.

Key Financial Disclosure

B&G Foods has done a good job disclosing key financial tools to facilitate

analysts assessment of their company. In their 10-K, we can easily find key

financial tools like discount rate, rate of return, risk free rate of return etc.

Compared to direct competitors like General Mills and Seneca Group, B&G Foods

has done a good job disclosing important tools that we previously cited. We went


through General Mills’ 10-K and we were able to found one key financial: the

discount rate. In Seneca Group’s 10-K, we were not able to find any of those

financial tools.

Weighted average grant date fair value _ 6.74%

Expected volatility _ 34.8%

Expected term _ 6.5years

Dividend yield _ 4.40%

Figure 2.8 Key Financials present in B&G Foods’ 10-K

January 3, 2015 December 28, 2013

Weighted-average assumptions:

Discount rate 4.82% 3.88%

Rate of compensation increase 3% 3%

Expected long-term rate of return 7.25% 6.5%


In a industry with moderate disclosure, B&G foods does a better job than his direct

competitors disclosing essential information to facilitate analysts, outsiders, and

people’s look on what is going on with their company.

Areas Lacking Disclosure

Suppliers:

B&G Foods did not do a good job stating the origins of their raw materials.

They omitted to inform customers about what was in the food they are selling.

The only origin given regarding a specific product was their maple syrup which

mainly comes from Quebec. There is a growing awareness of people toward the

importance of carefully selecting what they consume. There is an increase of

“green” interest groups, Organic movements, and food relation to health issues in

the society. Our Analysis suggest that clarifying more people about what they eat

will have a positive impact on how consumers view B&G Foods and affiliates. In

the Processed and packaged goods health related concerns are restricted subjects.

It will play in B&G Foods’ favor to initiate in programs and edifications going in this

sense.

Production process: Here is another area lacking information and disclosure from

B&G Foods’ 10-K. It is important to rise concerns about production process and

clarify consumers about how the food they eat is produced. In what conditions are

the raw materials raised (Poultry, Beef, corn etc.)? What are the sanitary

conditions on site? How effective is the quality control from suppliers? those are

few questions that are not edified in their 10-K. for example: Nutriments labeling.

It helps inform consumers, but it is not very effective, because you cannot list

everything in such a small area in the back of can or a bottle.


Environmental Issues: There is many concerns regarding the possible

effects of Industrial agriculture on the environment. General Mills is one of the

companies making move in this sense to reduce the effects of industrial activities

on our planet. B&G foods does not disclose a lot about “pro-environmental”

actions. With the actual environmental concern raised, this could considerably

improve B&G Foods from a consumers’ standpoint.

Conclusion

Beside the lack of information regarding the origins of their suppliers and

few environmental concerns, our analysis concluded that in a moderately disclosed

industry B&G Foods does a good job providing public with quality financial

information that can help analysts, investors, and creditors to have a real and

accurate feel about the real condition of their company.

Identify Potential Red Flags

Red flags are indicators of undesirable characteristics of a company and its

related stock. Red flags are not necessarily a breach in GAAP rules, but reporting

in a format that may confuse, mislead, or otherwise derail investor’s ability to value

a company. Examples of red flags include last minute transactions, huge asset

write offs, unreasonably low amortization rates, unrealistic assumptions on

goodwill, significant use of operating leases, and a significant inflow of revenue at

the end of periods.


How accounting policies are implemented can drastically affect how each of

the stated items can come across. This in turn can dramatically change how

financial data comes across to the public. Figures that would normally indicate the

financial strength of a firm, such as P/E ratios, could mislead investors into a bad

investment. Therefore, it is important to look at potential red flags to accurately

value B&G Foods.

Asset Write-Offs

Write-offs are reductions in the value of an asset, and result from an

expense that is directly related to the asset. They also directly impact the taxable

income of a company. Therefore it is essential to look at write-offs since they affect

key items in company financials.

B&G Foods wrote off a number of items in 2015 including a loss on the

extinguishment of debt and loss of inventory due to excess, obsolete, and

unsaleable goods. The write-off of the extinguishment of debt was .9% of net

income while loss of inventory was unreported. This is probably due to loss of

inventory being insignificant in size. Since write-offs are only .9% of net income,

we believe write-offs are not a red flag.

Amortization of Intangible Assets

Throughout 2014 and 2015, B&G Foods’ amortization rate of its intangible

assets hovered around 3.8% which was 3% lower than the average (figure 1.3).

This indicates that B&G Foods’ management feels that their intangible assets have

a longer useful life than the rest of the industry. Most of B&G Foods’ amortizable

intangibles came from customer accounts. This indicates that B&G Foods expects

its customers to continue business for an extended period of time.


If their assumption is wrong, their future revenue streams could be

significantly affected. If amortizable intangible assets account for over 30% of net

assets then we will restate their financials to more accurately reflect their

financials.

Figure 2.9 – Amortizable Intangible Assets compared to Net Assets

Since amortizable intangible assets are less than 30%, we will not restate

the financials. This indicates that amortizable intangible assets are not a red flag.

Operating Leases

Operating leases are a right to use but not own a particular asset. They are

not capitalized as they are treated as rent expense and recorded as an off balance

sheet item. “Operating leases have tax incentives and do not result in assets or

liabilities being recorded on the lessee's balance sheet, which can improve the

lessee's financial ratios” (Investopedia). Therefore, we must analyze operating

leases for red flags. If capitalized operating leases would increase non-current

liabilities by more than 20%, we must restate the financials to show this.

Figure 2.10 – Operating leases compared to total non-current liabilities

Percentage of Amortizable

Intangible Assets to Net Assets 2011 2012 2013 2014 2015

B&G Foods 11.23% 10.35% 11.56% 12.43% 11.90%

Operating leases to non-current liabilities 2015

B&G Foods 2.78%


Operating leases made up less than 20% of non-current liabilities, so no

restatement is necessary. Operating leases therefore are not considered a red flag.

Goodwill

Goodwill makes up a significant portion of B&G Foods assets, due to the

heavy number of acquisition B&G Foods has made. If goodwill makes up more

than 30% of net fixed assets, B&G Foods’ financials will have to be rewritten.

Figure 2.11 – Goodwill compared to net fixed assets

Since goodwill is over 20% of net fixed assets, we will have to restate the

financials to accurately display goodwill. In order to do so, we will amortize

goodwill over a five year period meaning that goodwill from 2011 to 2015 will need

to be calculated. Since goodwill is over 20% of net fixed assets, this is a red flag

that will dramatically change the valuation of our firm.

Conclusion

After examining goodwill, operating leases, amortization of intangible assets

and asset write-offs we have come to the conclusion that goodwill is B&G Foods’

red flag. Goodwill could potentially alter the valuation of the company and will

need to be restated to find the true value of B&G Foods.

Goodwill to Net Fixed Assets 2011 2012 2013 2014 2015

B&G Foods 417.26% 424.46% 255.80% 318.79% 327.99%


Undo Accounting Distortions

Based on the accounting analysis conducted in the previous sections of this

draft, it is possible to identify the factors that would cause accounting distortions

in this company’s financial statements.

There are four concepts that investors look into when evaluating whether to

restate or nor the financial statements of a firm:

1. Goodwill > 30% of Net Fixed Assets

2. Goodwill Impairment eliminates > 30% Operating Income

3. R&D expense reduces operating income by more than 20%

4. Capitalized Operating Leases would increase non-current

liabilities by more than 20%

If any of the four statements above exceeds barriers, then financial

statements must be restored. By reviewing B&G Foods’ financials statements it is

evident that both 1 and 2 of the concepts above are exceeded. Therefore, the

financial statements must be restated for the past 5 or 6 years.

”Goodwill is an intangible asset that arises as a result of the acquisition of

one company by another for a premium value. A goodwill includes the company’s

brand name, solid customer base, good customer relations, employee relations

and any patents or proprietary technology. Goodwill is considered an intangible

asset because it is not a physical asset like buildings or equipment” (FASB.ORG).

B&G Foods has acquired multiple firms since the company was founded. The

company currently owns 41 different brands; thus, the amount of goodwill is

extremely high as compared to Net Fixed Assets.


Figure 2.12 – Goodwill comparison to Net Fixed Assets

In the past five years B&G Foods’ has maintained a Goodwill on average

250% bigger than the company’s Net Fixed Assets. Financial statements must be

restated. Impairment adjustments will be made to the table below, along with the

restatement of financial statements. When reviewing the company’s goodwill for

the past five years it is possible to see that the company has only impaired goodwill

once in the last five years (2014).

$263 $268

$319

$370

$473

$92 $105 $110 $116

$164

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2011 2012 2013 2014 2015

Goodwill compared to Net Fixed Assets

Goodwill Net Fixed Assets


Figures In Millions2011 (As stated) Dr. Cr. 2011 (Restated) Change in NI

Assets

Current Assets:

Cash & Short Term $ 16.74 16.74$

Accounts Receivable $ 42.01 42.01$

Inventories $ 85.23 85.23$

Other Current Assets $ 6.25 6.25$

Total Current Assets $ 150.22 150.22$

Net Property, Plant &

Equipment $ 61.93

61.93$

Intangible Assets $ 897.35 897.35$

Goodwill 267.94$ 53.58$ 267.94$ 214.36$

Total Assets $ 1,130.00 1,130.00$ 1,076.42$

-$

Liabilities & Stockholders

Equity -$

Current Liabilties: $ 9.75 9.75$

Accounts Payable $ 24.43 24.43$

Other Current Liabilities $ 37.69 37.69$

Total Current Liabilities $ 71.87 71.87$

Deferred Taxes $ 105.74 105.74$

Other Liabilities $ 9.41 9.41$

Total Liabilities $ 897.38 897.38$

Common Equity (Total) $ 235.55 235.55$

Total Shareholders'

Equity $ 235.55

235.55$

Total Equity $ 235.55 235.55$

Retained Earnings 85.58$ 55.58$ 30.00$ 55.58$

Liabilities &

Shareholders' Equity $ 1,130.00

1,130.00$ 1,074.42$

Balance SheetYears Ended December 31st


2012 (As stated) Dr. Cr. 2012 (As stated)Change in NI

Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 19.22

19.22$






Equipment $ 104.75

104.75$


Goodwill 282.38$ 53.58$ 282.38$ 228.80$

Total Assets $ 1,190.00 1,190.00$ 1,136.42$

-$


Equity -$









Total Shareholders'

Equity $ 361.18

361.18$

Total Equity $ 361.18 361.18$


Liabilities &


1,190.00$ 1,121.97$



Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 4.11

4.11$


Inventories $ 101.25 101.25$




Equipment $ 110.37

110.37$

Intangible Assets $ 1,160.00 1,160.00$

Goodwill 318.97$ 53.58$ 318.97$ 265.39$

Total Assets $ 1,480.00 1,480.00$ 1,426.42$

-$


Equity -$







Total Liabilities $ 1,110.00 1,110.00$


Total Shareholders'

Equity $ 378.36

378.36$

Total Equity $ 378.36 378.36$

Retained Earnings 197.19$ 104.61 92.58$ 104.61

Liabilities &


1,480.00$ 1,375.39$



Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 1.49

1.49$


Inventories $ 106.56 106.56$




Equipment $ 116.20

116.20$


Goodwill 340.15$ 53.58$ 340.15$ 286.57$

Total Assets $ 1,650.00 1,650.00$ 1,596.42$

-$


Equity -$









Total Shareholders'

Equity $ 338.00

338.00$

Total Equity $ 338.00 338.00$


Liabilities &


1,650.00$ 1,558.36$



Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 5.25

5.25$


Inventories $ 312.88 312.88$




Equipment $ 163.64

163.64$


Goodwill 285.40$ 53.58$ 285.40$ 231.82$

Total Assets $ 2,570.00 2,570.00$ 2,516.42$

-$


Equity -$









Total Shareholders'

Equity $ 457.69

457.69$

Total Equity $ 457.69 457.69$


Liabilities &


2,570.00$ 2,498.96$


Introduction to Financial Analysis

In order to develop a clear understanding of a firm’s value, a prospective

analysis must be conducted. The primary portion of this prospective analysis

consists of forecasting the firm’s restated financials as well as evaluating their

current ones through the use of profitability and liquidity ratios. This analysis will

show B&G Foods’ ability to repay their debt, their operating efficiencies, and their

potential future sales and costs of goods sold. Finally, this section will cover the

firm’s weighted average cost of capital (WACC) through the calculation of their

cost of debt and equity.

Ratio Analysis

The analysis of a firm’s ratios is a good indicator of the firm’s current

financial standing. These ratios show how well the firm is operating and their

relative efficiency compared to the firm’s benchmark competitors. The ratios

discussed in this section will show the profitability, liquidity, and capital structure

of the firm. These ratios are essential to forecasting the firm’s potential future

performance.

Liquidity Ratios

The ratios concerning the firm’s liquidity involve the cash and cash

equivalents that they currently have and their respective ability to repay their

current liabilities. Liquid assets are ones that may be quickly converted into cash

in the event of the firm having to repay their debt. The higher the liquidity of the

firm the more favorable they are to financial institutions which may lend the firm

funds in order to raise capital. Also, the higher the liquidity of the firm, the more

financially sound they are to potential investors. The ratios we will examine in this


section include the quick asset ratio, current ratio, working capital turnover,

inventory turnover, accounts receivable turnover, and cash to cash cycle.

Current Ratio

The firm’s current ratio relates to a firm’s current liabilities relative to their

current assets. This ratio is significant because it indicates a firm’s liquidity as well

as the composition of their balance sheet. The current ratio is computed simply by

taking the firm’s current assets divided by their current liabilities. The type of

current assets that the firm has must also be taken into account because some

current assets are easier to liquidate than others. However, if a firm has a ratio of

over one it is considered to be liquid and able to repay their current liabilities with

ease under regular economic conditions.

2011 2012 2013 2014 2015

B&G Foods 2.09 1.57 1.72 2.12 3.43

Kellogg 0.91 0.75 0.85 0.77 0.56

The J.M. Smucker 3.39 2.66 2.67 1.73 2.01

General Mills Inc. 1.07 0.96 0.81 0.81 0.77

Industry 1.87 1.49 1.51 1.36 1.69

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Current ratio


Relative to their benchmark competitors B&G Foods’ current ratio is

significantly higher. The only other competitor with a ratio as high as B&G Foods

is The J.M Smucker group who has had a declining ratio since 2011. The increasing

current ratio for B&G Foods indicates that they are increasingly able to cover their

current liabilities in the event of a crisis.

Quick Asset Ratio

The quick asset ratio is similar to the current ratio however; it is more descriptive

because of the fact that it takes into account the liquidity of each of the firm’s current

assets. For example, a firm that produces a specialized product, and has a large amount

of inventory of this product, may not be able to quickly liquidate this inventory because

of the specialized nature of the inventory. The quick asset ratio takes this into account

and therefore only includes the assets which can be easily liquidated quickly if need be.

Similar to the current ratio, the higher the firm’s ratio, the better. However, it differs from

the current ratio in the fact that it is acceptable for a firm to have a ratio that is below

one because often times firm’s hold inventory as a significant portion of their assets.

2011 2012 2013 2014 2015

B&G Foods 0.78 0.60 0.63 0.62 0.56

Kellogg 0.21 0.12 0.16 0.18 0.11

The J.M. Smucker 1.60 1.11 1.09 0.68 0.87


Industry 0.81 0.60 0.60 0.50 0.50

0.000.200.400.600.801.001.201.401.601.80

Quick asset ratio


The quick asset ratio industry wide is considerably lower than the current

ratios due to the fact that inventories are removed. The industry seems to be

converging to a figure between .50-.80 besides two of the benchmark competitors.

B&G Foods has the second highest quick asset ratio meaning that they are able to

cover their current liabilities through their most liquid current assets better than

most of their benchmark competitors. However, a ratio below 1 is less than

desirable because in the case of a downturn in the economy the company must

be able to cover their current liabilities.

Conclusion

In the processed an packaged food industry many of the companies lack

sufficient liquidity. B&G Foods has a superior current ratio and an above industry

average quick asset ratio indicating that they would be able to cover their current

liabilities in the case of an economic downturn. The only concern in regard to B&G

Foods’ liquidity would be their quick asset ratio being below one however, this is

in part due to the inventory on hand. Besides The J.M Smucker Group, the industry

liquidity ratios have remained stable.

Operating Efficiency Ratios

A firm’s operating efficiency ratios indicate how quickly and efficiently the

firm is able to convert their inventory and accounts receivable into cash. Typically,

the higher the firm’s ratios, the more efficiently they are operating and they more

likely they are to be able to cover their current liabilities. Firm’s that operate more

efficiently are also usually able to keep less inventory on hand thus, have more

liquid current assets.


Inventory Turnover

The inventory turnover ratio shows how quickly a firm can convert their

inventory to assets such as accounts receivable or cash. This ratio is computed by

taking the firm’s costs of goods sold and dividing it by their inventory. Usually, in

the processed and packaged food industry, maintaining a higher inventory

turnover ratio is preferred because that means there is less inventory on hand and

a constant sales and cost of goods sold.

Throughout the industry there seems to be a drastic difference from

company to company in terms of inventory turnover. B&G Foods is on the lower

end of the industry rates with a sharp decline apart from 2014. This is means it is

taking them longer to convert inventory to sales which in turn is costing the firm

2011 2012 2013 2014 2015

B&G Foods 4.30 4.57 4.76 5.63 2.16

Kellogg 7.11 6.42 6.96 7.44 7.08

The J.M. Smucker 3.51 3.83 4.09 3.84 3.20


Industry 5.12 5.50 5.79 6.08 5.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Inventory Turnover


more to hold the inventory until it is sold. Typically, this is not something that is

desirable in the processed and packaged food industry because shelf life is

something that companies try to decrease for food products.

Days Supply Inventory

The days supply inventory indicates how much inventory a firm must have

on hand due to their inventory turnover ratio. This ratio is computed by taking 365

and dividing it by the inventory turnover ratio. This ratio is indicative of the amount

of days that the firm can produce for given their supply of inventory on hand. The

lower the number, the faster the firm is turning over their inventory thus, the more

efficient they are operating.

2011 2012 2013 2014 2015

B&G Foods 84.98 79.81 76.67 64.80 168.74

Kellogg 51.35 56.86 52.42 49.05 51.59

The J.M. Smucker 104.12 95.36 89.17 94.93 114.05


Industry 76.56 70.72 66.99 64.53 95.63

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00



Although the industry average has been increasing apart from 2014, B&G

Foods has the longest holding period relative to their benchmark competitors. Due

to the direct relation between inventory turnover and days supply inventory it

makes sense that B&G Foods has the longest holding period however, this may be

a cause for concern.

Accounts Receivable Turnover

The accounts receivable turnover ratio shows the company’s accounts

receivable as related to the company’s total sales. It is computed by taking the

total sales divided by the accounts receivable. The higher the number the more

frequently they are collecting their accounts receivable and in turn the lower their

days sales outstanding figure will be.

2011 2012 2013 2014 2015

B&G Foods 13.78 14.62 11.55 15.16 13.86

Kellogg 11.11 9.76 10.39 11.43 10.06

The J.M. Smucker 14.01 15.90 18.80 18.13 13.24


Industry 12.93 13.22 13.26 14.20 12.47

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00



In relation to the industry, B&G Foods has an above average accounts

receivable turnover. This indicates that they are turning over their accounts

receivable more times per year than their benchmark competitors. This is a positive

indication that they are completing sales and collecting funds for them more often

then the other companies operating in their industry. They have the second

highest turnover rate, only surpassed by The J.M Smuckers Group.

Days Sales Outstanding

The days sales outstanding figure is indicative of the number of days that it

takes for a firm to collect their accounts receivable. This number is usually referred

to as a collection period for the firm. The lower the number, the faster the firm

receives their cash collection thus, the quicker they can reinvest those funds in the

firm. This ratio is computed by taking 365 and dividing it by the accounts receivable

turnover ratio. The lower the number the better off the firm is.

2011 2012 2013 2014 2015

B&G Foods 26.49 24.97 31.60 24.07 26.33

Kellogg 32.85 37.38 35.14 31.94 36.27

The J.M. Smucker 26.05 22.95 19.41 20.13 27.58


Industry 28.48 28.58 28.96 26.59 29.72

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00



The days sales outstanding for the industry appears to be converging to a figure

between 25-30 days indicating that they usually collect their accounts receivable

within a month of the sale. B&G Foods has the lowest collection period in the

industry, meaning that they are able to collect funds the quickest relative to their

benchmark competitors.

Cash to Cash Cycle

The Cash to Cash Cycle ratio is a combination of operating efficiency ratios

indicating the number of days from when the firm invests in inventory to when the firm

receives the cash from the sale. The lower the number, the faster the firm makes a profit

and can begin the entire process again. Because this figure is dependent on two turnover

ratios, it is a consolidated operating efficiency figure representing the firm’s ability to

complete the sales process.

2011 2012 2013 2014 2015

B&G Foods 111.47 104.78 108.26 88.87 195.07

Kellogg 84.21 94.24 87.56 81.00 87.86

The J.M. Smucker 130.17 118.31 108.59 115.06 141.62


Industry 105.04 99.30 95.95 91.12 125.35

0.00

50.00

100.00

150.00

200.00

250.00

Cash to Cash Cycle


Industry-wide this figure seems to be escalating apart from 2014 indicating

that it is taking firms longer to complete the sales process. However, B&G Foods

has the highest figure relative to competitors, which is largely due to their lower

inventory turnover rates and days supply inventory. This is a cause for concern for

B&G Foods and shows that they must increase their inventory operating

efficiencies in order to reduce this cash to cash cycle.

Working Capital Turnover Ratio

The working capital turnover ratio is an indicator of the production efficiency

of the firm. This ratio is computed by taking the firm’s sales and dividing it by their

working capital. Essentially, the higher the number is, the more sales the firm is

producing relative to their working capital.

2011 2012 2013 2014 2015

B&G Foods 6.94 10.60 9.54 8.17 2.94

Kellogg -46.15 -12.42 -26.04 -14.24 -5.40

The J.M. Smucker 4.18 5.38 5.91 8.66 5.53

General Mills Inc. 61.29 -109.74 -17.86 -17.39 -15.96

Industry 6.56 -26.54 -7.11 -3.70 -3.22

-120.00

-100.00

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

Working Capital Turnover


The industry as a whole seems to be converging to a figure between -.10

and 1. General Mills is largely the reason that the industry average is low because

of their negative value. B&G Foods is among the top two companies within the

industry in terms of working capital turnover. This is a positive indication that B&G

Foods is operating efficiently and using their working capital well.

Conclusion

In the processed and packaged food industry B&G Foods leads in working

capital turnover and accounts receivable turnover however, they could improve

their inventory efficiencies. These inventory inefficiencies which B&G Foods

experiences are the primary reason which they have the longest cash to cash cycle

compared to their benchmark competitors.

Profitability Ratios

Profitability ratios are essential to developing a clear understanding of what

portion of the firm’s sales are related to profit and what portion goes to covering

costs of goods sold and overhead expenses. Firms with higher profitability ratios

are able to take these profits and further expand the firm which promotes long

term growth.

Gross Profit Margin

Gross Profit Margin is computed by dividing gross profit, or revenue less cost

of goods sold, by total revenue. A higher gross profit margin is desirable; because

it indicates higher revenues related to direct costs associated with those revenues.


As seen in the table above, there seems to be an industry average trend

approaching 33% for all firms. B&G Foods has one of the lower gross profit margin

ratios relative to their benchmark competitors. The industry’s highest gross profit

margin throughout the period was held by Kellogg indicating that they have more

successful profitability strategies. Although B&G Foods has a low gross profit

margin, it appears to remain relatively stable with a slight decrease in the latter

portion of the period.

2011 2012 2013 2014 2015

B&G Foods 33% 35% 34% 29% 30%

Kellogg 39% 38% 41% 35% 35%

The J.M. Smucker 37% 33% 34% 36% 35%

General Mills Inc. 40% 36% 36% 36% 34%

Industry 37% 36% 36% 34% 33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Gross Profit Margin


Operating Profit Margin

After operating expenses have been paid, a firm can divide the remaining

operating income by sales to compute the Operating Profit Margin. This ratio is

indicative of the portion of income from operations that is related to profit. It can

also be used as a great measure of how efficient the firm is being with regards to

operations such as pricing. The fewer operating expenses that a firm incurs, the

more profitable it’s income from operations will be.

Operating profit margins vary widely throughout the period with The J.M Smucker

group leading for the majority with the exception of 2012. The industry exhibits significant

2011 2012 2013 2014 2015

B&G Foods 21% 24% 21% 14% 18%

Kellogg 11% 11% 19% 7% 8%

The J.M. Smucker 26% 21% 24% 26% 21%


Industry 19% 19% 20% 16% 15%

Restated 10% 13% 10% 11% 12%

0%

5%

10%

15%

20%

25%

30%



segmentation for this particular profitability ratio. However, B&G Foods has one of the

consistently higher operating profit margins indicating that they experience a high level

of operating efficiencies. After restating B&G Foods’ financials, it is evident that their

their operating profit margin decreased substantially. This may be in part to the

depreciation and goodwill factored throughout the calculation.

Net Profit Margin

The net profit margin is considered one of the more significant profitability

ratios because it takes into account nearly all of the expenses the firm experiences.

This percentage represents a firm’s ability to turn revenues into actual profit. While

Operating Profit Margin relates operating income to sales, Net Profit Margin shows

how profitable the firm is after factoring in taxes, interest, and other selling

expenses.

2011 2012 2013 2014 2015

B&G Foods 9% 9% 7% 5% 7%

Kellogg 7% 7% 12% 4% 5%

The J.M. Smucker 10% 8% 9% 10% 6%


Industry 9% 8% 10% 7% 6%

Restated 3% 5% 3% 5% 5%

0%

2%

4%

6%

8%

10%

12%

14%

Net Profit Margin


As seen in the table above, there is a significant degree of variation in net profit

margins throughout the industry. General Mills has the highest net profit margin in the

industry throughout the period aside from the year 2013. B&G Foods exhibits variation

throughout the period on an as stated basis with net profit margins initially decreasing

and then increasing again in the latter portion of the period. On a restated basis B&G

Foods’ net profit margin consistently underperforms the industry average.

Asset Turnover Ratio

Asset turnover shows total revenues or sales of the current year in

proportion to the value of the firm’s total assets from the previous year. This is

considered a “lagged” ratio because it is computed by taking sales divided by total

assets of the prior year. This ratio links the relation between the income statement

and balance sheet, making it a useful ratio to identify the firm’s overall

performance. The higher the ratio, the more revenues the firm is generating per

dollar of asset value.

2011 2012 2013 2014 2015

B&G Foods 0.53 0.55 0.54 0.54 0.46

Kellogg 1.04 0.98 0.93 0.97 0.96

The J.M. Smucker 0.58 0.61 0.65 0.62 0.34


Industry 0.74 0.73 0.73 0.72 0.64

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Asset Turnover


As seen above, there is a significant degree of segmentation throughout the

industry in asset turnover ratios. B&G Foods has an asset turnover ratio which

consistently underperformed the industry average. Moreover, their ratio was the

lowest in the industry for the majority of the period. This is a negative indication

of their sales performance relative to the dollar value of their total assets.

Return on Assets

Return on Assets, or ROA, is calculated by dividing Net Income by the Total

Assets for the previous year. This profitability ratio represents how well the firm

utilizes their assets to maximize their income. The higher the ratio, the more

profitable the firm and the more efficiently they are using their assets.

2011 2012 2013 2014 2015

B&G Foods 5% 5% 4% 3% 3%

Kellogg 7% 8% 12% 4% 4%

The J.M. Smucker 6% 5% 6% 6% 2%


Industry 7% 6% 8% 5% 4%

Return on Assets 2% 3% 3% 2% 2%

0%

2%

4%

6%

8%

10%

12%

14%

Return on Assets


As seen in the table above, return on assets vary significantly between firms

in the processed and packaged food industry. On an as stated basis, B&G Foods

has one of the lowest return on assets aside from the year 2015 in which The J.M

Smucker group underperformed them. On a restated basis, B&G Foods not only

consistently underperformed the industry average but also had the lowest return

on assets relative to their benchmark competitors.

Return on Equity

The return on equity ratio represents the firm’s income relative to their total

equity of the previous year. This ratio shows how well the firm is using their

stockholder’s equity to maximize income. It is calculated by taking the net income

from the current year and dividing it by the total equity from the previous year.

2011 2012 2013 2014 2015

B&G Foods 27% 25% 14% 11% 20%

Kellogg 40% 55% 73% 18% 22%

The J.M. Smucker 9% 9% 11% 11% 5%


Industry 26% 27% 30% 16% 17%

Return on Equity 17% 18% 12% 5% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Return on Equity


There appears to be significant variation from firm to firm for ROE

throughout the industry as seen in the table above. The industry average

drastically decreased after the year 2013 and has been steadily dropping from that

point forward. Kellogg has the highest ROE for the majority of the period only

being surpassed by General Mills in 2014. All other factors aside, B&G Foods and

The J.M Smucker group are not utilizing shareholder wealth at optimal levels in

order to generate profits relative to their benchmark competitors.

Conclusion

B&G Foods appears to be in need of increases in operating efficiencies in order to

improve profitability. They have consistently been among the lower firms in the majority

of the above profitability ratios. Due to the lagged nature of some of these ratios, and

the difficulty of increasing efficiencies, they take some time to improve and are thus stable

through time. Kellogg and General Mills are the top competitors in the industry and B&G

Foods will need to improve profitability and efficiency in order to better compete with

them.

Capital Structure Ratios

A firm’s capital structure ratios are a measure of how their they finance their

assets through debt and equity. Typically, the more debt a firm has, the riskier the

firm is considered to be by investors. However, the the cost of debt is usually

cheaper than the cost of equity therefore it is something that must be considered

when evaluating a company.


Debt to Equity

The debt to equity ratio is representative of a firm’s capital structure. The

more leveraged the firm is, the higher the ratio will be. It is computed by taking

the total value of liabilities divided by the book value of stockholder’s equity. The

higher the leverage of the firm, the higher the return on equity they will produce.

However, this also indicates that the firm is considered riskier because equity

claims are residual and debt must be paid off first in the case of an economic crisis

for the firm.

As seen above, there is a segmentation of debt to equity ratios throughout

the industry with values ranging from 0 to 6.2. B&G Foods has a higher ratio than

most of their benchmark competitors with the exception of Kellogg. This high ratio

2011 2012 2013 2014 2015

B&G Foods 3.81 2.30 2.92 3.88 4.62

Kellogg 5.75 5.15 3.29 4.31 6.17

The J.M. Smucker 0.57 0.77 0.75 0.80 1.38


Industry 2.99 2.49 2.19 2.72 3.68

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Debt to Equity Ratio (total liabilities)


indicates that B&G Foods is more leveraged than their competitors within the

industry thus, considered riskier by investors. Although the ratios throughout the

industry are vary significantly, they have exhibited a steadily increasing rate apart

from 2014 meaning that most firms are slowly acquiring more debt.

Times Interest Earned

Times interest earned is a represents the firm’s ability to repay their debt’s

interest relative to their regular operating income. It is calculated by taking the

firm’s net income before interest and taxes divided by their interest expense. The

higher the ratio, the more easily a firm can pay their interest thus the more

favorable terms they will attain if they need to acquire debt to raise capital.

Although there is a range of values throughout the industry for the times

interest earned ratio, there is a declining pattern seen apart from 2014. B&G Foods

2011 2012 2013 2014 2015

B&G Foods 2.89 2.87 2.83 2.79 2.32

Kellogg 6.12 5.98 12.07 4.90 4.81

The J.M. Smucker 10.30 8.62 8.75 10.70 6.55


Industry 6.67 6.30 7.91 6.79 4.82

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Times Interest Earned Ratio


has the lowest value in the industry indicating that their interest expense accounts

for a large portion of their net income before interest and taxes. This low ratio

may be a cause for concern in the case that the firm is attempting to acquire new

debt because of the high proportion of their income already allotted to interest

expenses.

Altman’s Z-Score

The Altman Z-Score is a measurement of creditworthiness that consists of

five ratios. This measurement is used to predict the probability of bankruptcy for

a firm. A score below 1.81 indicates that bankruptcy is a greater possibility. A score

between 1.81 and 2.67 is the grey are in which it is undetermined and any score

about 2.67 is considered credit worthy with little to no risk of bankruptcy. The

calculation is computed as follows:

Z- Score= 1.2(net working capital/total assets) + 1.4(retained earnings/total assets) +

3.3(EBIT/total assets) + .6(MVE/BVL) + (sales/total assets).

2011 2012 2013 2014 2015

B&G Foods 1.62 2.14 1.86 1.65 1.40

Kellogg 3.99 3.41 4.09 3.87 3.92

The J.M. Smucker 1.20 1.17 1.28 1.21 0.66


Industry 2.73 2.63 2.81 2.71 2.49

0.000.50

1.001.502.002.503.003.504.004.50

Altman's Z-Score


The Z-scores of firms in the processed and packaged foods industry are

segmented with values ranging from .50 to 4. The industry average appears to

steadily remain near a value of 2.50. B&G Foods has historically maintained one

of the lower values in the industry. This is an indication that the firm is more

susceptible to bankruptcy relative to their benchmark competitors with the

exception of The J.M Smucker Group.

Internal Growth Rate

The internal growth rate measures the level of growth attainable to a firm

without altering their current capital structure or acquiring more debt. It is

calculated by taking the return on assets times (One - Dividend Payout Ratio). This

rate is an indicator of the firm’s ability to create value and expand the firm itself.

2011 2012 2013 2014 2015

B&G Foods 8% 12% 13% 14% 12%

Kellogg 56% 37% 44% 44% 43%

The J.M. Smucker 10% 11% 12% 12% 7%


Industry 31% 27% 29% 30% 29%

0%

10%

20%

30%

40%

50%

60%



As seen above, the internal growth rate of firms within the processed and

packaged food industry are characterized by segmentation throughout the last five

years. B&G Foods, being one of the smaller firms in the industry, has experienced

a relatively stable rate of ten percent. Although this is one of the lower rates in

the industry, their growth is stable indicating that their dividend payout ratio has

remained constant. This rate could be improved by more efficient utilization of

their assets to further create value.

Sustainable Growth Rate

The sustainable growth rate (SGR) is similar to the internal growth rate

however, the difference lies in the fact that more debt can be acquired in with the

SGR as long as the same amount of equity is issued. It can be calculated as the

return on equity times (One – Dividend Payout Ratio). This ratio shows the rate at

which a firm can grow with it’s current capital structure proportions.

2011 2012 2013 2014 2015

B&G Foods 5% 2% -4% -8% -3%

Kellogg 14% 21% 48% 0% -2%

The J.M. Smucker 13% 13% 15% 16% 16%


Industry 12% 11% 18% 4% 4%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%



The sustainable growth rates exhibited in the line graph above show an

industry average converging to a value of five percent. B&G Foods has consistently

remained below the industry average however; it has been increasing in the last

couple years indicating that they have decreased their dividend payout ratio in

order to reinvest in the firm. This reduction in dividends provides a more positive

outlook for the firm going forward due to the increase in reinvestment.

Conclusion

The capital structure of firms in the processed and packaged food industry

varies vastly from company to company. Many companies use very little debt to

finance their operations however, B&G Foods is one of the more leveraged firms

in the industry. This leverage provides investors with a higher return but in turn

causes B&G Foods to be widely considered riskier than their benchmark

competitors. The only cause for concern regarding B&G Foods would be their

Altman Z-score value however, this value is exhibiting an increasing trend meaning

that the firm is moving away from debt financing in attempts to reduce their

mandatory interest payments. All other capital structure ratios for B&G Foods show

that the firm is able to generate and maintain growth and cover their debt liabilities

with their current capital structure.

Financial Forecasting

Forecasting financials is crucial to determining the intrinsic value of a firm.

Therefore, it is important that financials are forecasted in a fair way. In order to

forecast in a fair way, it is important to look at historical data, analyze ratios, and

look at industry trends. With this being said, forecasts can be inaccurate with

inaccuracies becoming more pronounced as time goes on. For the 2016 fiscal year,


we had no previous 10-Qs for the year since the 10-K for 2015 had recently come

out. The income statement was the first item we forecasted since it contained

many of the key financials that were used to forecast items later. We then followed

by forecasting the balance sheet, and finally the statement of cash flows due to

the difficulty of forecasting it.

Income Statement

When forecasting, it is important to start with forecasts that are relatively

easy and accurate to formulate. Therefore, we started with the income statement

as it has many financials that were used later in the balance sheet and statement

of cash flows. We used the past six years’ worth of data to finds trends in specific

financials. We started by predicting the sales growth of B&G Foods for the next 10

years as sales are used to calculate many other forecasts. Sales were determined

by looking at the previous six years’ worth of data in which B&G Foods was roughly

doubling its sales every five years.

While B&G Foods is acquiring many companies and increasing its sales

capacity, we believe that it will be unable to continue its current sales growth due

to competition within the packaged and processed foods industry. We thus decided

to use a more conservative growth rate of 12% annually that gradually decreased

to 10%. This 10% is a substantial decrease from the 13.5% annual growth rate

(average) B&G Foods has exhibited over the past 5 years. We believe this

conservative value accurately depicts B&G Foods growth rate as competitors enter

into B&G Foods niche markets.

Once we had sales, it was then possible to forecast out cost of goods sold,

gross profit, gross profit margin, operating income, operating profit margin, selling


and administrative costs, net income, and finally net income margin. We used a

common sized income statement to forecast the previously stated items. A

common sized income statement is created by dividing every line item by the sales

in the corresponding year. This allowed us to find trends in the data and thus

forecast the above stated figures. We implemented sales in every figure mentioned

above (except selling and administrative expenses) to forecast out the data.

All of the above mentioned items were relatively stable throughout the past

six years except cost of products sold. This is due in part to the numerus

acquisitions B&G Foods has made over the past six years. New products will

introduce new costs to the firm. We predict these costs to become more

streamlined over time. This can be seen in the decreasing variations in forecasted

cost of goods sold. Variations decreased to roughly 3% over three years compared

to the previous 8%. For the rest of the forecasted data, forecasts were relatively

similar to those of the previous six years. The forecasted information from the

income statement allowed us to then forecast out the balance sheet.

In Millions Actual Financial Statement Forecasted Financial Statement

Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 513 544 634 725 848 966 1082 1201 1322 1454 1599 1759 1935 2128 2341 2575

Cost of Goods Sold 346 366 410 482 600 677 736 781 938 1018 1087 1143 1374 1490 1592

Gross Profit 168 178 223 243 248 290 346 420 383 436 512 616 561 638 749

Selling General and Administrative Expenses 56 58 66 79 93 106 118 131 144 158 174 192 211 232 255

Operating Income 105 113 149 154 116 172 227 276 251 262 336 405 368 383 492

Net Income 32 50 59 52 41 69 76 90 106 87 112 132 155 128 164


Dividends Forecast

Quarterly dividends for the past six years have been steadily increasing from

17 cents a share to the more current 35 cents a share. We expect this trend to

continue leading to a slow increase in dividends paid per share. We followed the

trend and found that dividends increased roughly two cents a year.

In Percentage of Sales Actual Financial Statement Forecasted Financial Statement

Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Cost of Goods Sold 67% 67% 65% 66% 71% 70% 68% 65% 71% 70% 68% 65% 71% 70% 68%

Gross Profit 33% 33% 35% 34% 29% 30% 32% 35% 29% 30% 32% 35% 29% 30% 32%

Selling General and Administrative Expenses 11% 11% 10% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11%

Operating Income 20% 21% 24% 21% 14% 18% 21% 23% 19% 18% 21% 23% 19% 18% 21%

Net Income 6% 9% 9% 7% 5% 7% 7% 8% 8% 6% 7% 8% 8% 6% 7%

In Millions Restated Financial Statement Forecasted Financial Statement

Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 513 544 634 725 848 966 1082 1201 1322 1454 1599 1759 1935 2128 2341 2575


Gross Profit 168 178 223 243 248 290 346 420 383 436 512 616 561 638 749



Net Income 32 15 29 20 42 46 58 36 66 87 48 88 116 64 117

In Percentage of Sales Restated Financial Statement Forecasted Financial Statement

Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


Gross Profit 33% 33% 35% 34% 29% 30% 32% 35% 29% 30% 32% 35% 29% 30% 32%



Net Income 6% 3% 5% 3% 5% 5% 5% 3% 5% 6% 3% 5% 6% 3% 5%


Figure 3.1 – Dividends Paid per Share

We implemented a stair step function that increased quarterly dividends by

two cents (as seen in figure 3.6) leading to an increase of eight cents per share

per year. Since dividends paid per share were relatively stable throughout the past

six years, we did not anticipate any abnormal dividend payments. With dividends

and the income statement forecasted, we can now forecast out the balance sheet.

Balance Sheet

In order to begin forecasting out the balance sheet, it was necessary to

forecast out ratios such as the asset turnover ratio. We found that the asset

turnover ratio varied slightly from year to year, but stayed around .52 throughout

the last six years of data. Our forecasted asset turnover ratio stayed around this

number in the same manner as the previous six years.

Assets were then forecasted based off of the asset turnover ratio. After we

had total assets forecasted, we were then able to forecast out current assets by

using current assets/ total assets. We then looked for trends and found that

current assets/total assets averages around 14%. We thus forecasted out current

assets/total assets at 14% expecting this ratio to roughly stay the same. With the

current assets/ total assets ratio forecasted, we were then able to forecast current

assets.

We then forecasted inventory using the inventory turnover function and

days supply inventory function. We started with the days supply of inventory since

inventory turnover uses days supply of inventory in its calculations. Days supply

Forecasted Dividends 2016 2017 2018 2019 2020 2021 2022 2023 2024

Per Share 1.44 1.52 1.60 1.68 1.76 1.84 1.92 2.00 2.08


inventory was roughly around 100 days when we averaged out the previous six

years. With this being said, days supply inventory nearly tripled in 2015. We don’t

expect days supply of inventory to remain at such high numbers so we forecasted

out days supply of inventory to gradually reach 100 days again. Once we had days

supply of inventory, we then forecasted out inventory turnover by dividing 365 by

the days supply of inventory. We could then find inventory by taking the forecasted

cost of goods sold and divide it by the forecasted inventory turnover ratio.

Once we had the assets forecasted we could move on to liabilities and

shareholders’ equity. Since this project is mainly about forecasting equity, it was

more important to accurately forecast equity over liabilities concerning accuracy.

We forecasted retained earnings by taking the net income from the current year,

subtracting dividends paid and adding the result to the previous year’s retained

earnings. Total shareholder’s equity was then forecasted by taking net income for

the year and subtracting dividends paid for the year and adding the result to the

previous year’s shareholder’s equity.

Once shareholder’s equity and assets were forecasted, liabilities could be

forecasted by taking assets and subtracting total shareholder’s equity. The current

ratio was used to find current liabilities and non-current liabilities were found by

taking total liabilities minus the resulting current liabilities. Once the balance sheet

was forecasted, we could then move on to forecasting the statement of cash flows

using the forecasted dividends. Operating and investing line items were also used

to forecast the rest of the statement of cash flows.



Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Assets

Current assets

Cash and cash equivalents 98 17 19 4 1 5

Marketable securities

Accounts receivable trade, less

allowances for doubtful accounts 34 39 43 63 56 70 79 88 97 106 117 129 142 156 171

Inventories 74 85 90 101 107 313 302 257 257 223 238 251 301 327 349

Deferred taxes on income 5 2 2 2 3 5

Prepaid expenses and other receivables 0.2 5 5 8 15 68

Other current assets 2 3 4 3 14 3

Total current assets 215 150 164 182 197 463 332 351 371 460 485 513 544 673 711

Non-Current assets

Property, plant and equipment, net 61 62 105 110 116 164 164 164 164 164 164 164 164 164 164

Intangible assets, net 332 635 637 844 948 1442

Goodwill 203 263 268 319 370 473 473 473 473 473 473 473 473 473 473

Deferred taxes on income

Other assets 10 23 18 29 18 29

Total non-current assets 656 983 1028 1303 1453 2109

Total assets 871 1133 1192 1484 1649 2572 2403 2541 2692 3331 3518 3721 3941 4877 5151

Liabilities and Shareholders' Equity

Current liabilities

Loans and notes payable 15 10 40 26 19 34

Accounts payable 9 24 25 43 38 50

Accrued liabilities 25 27 24 19 18 31

Other current liabilities 12 11 15 18 18 20

Total current liabilities 61 72 104 106 93 135 97 102 108 134 142 150 159 196 207

Non-Current liabilities

Long-term debt 477 710 597 845 1007 1726


Other liabilities 4 9 8 9 7 3

Total non-current liabilities 580 826 727 1000 1219 1979 1854 1983 2112 2734 2901 3068 3233 4117 4333

Total liabilities 641 897 831 1106 1311 2114 1951 2085 2221 2868 3042 3217 3392 4313 4540

Common stock 0.48 0.48 0.53 0.53 0.54 0.58

Accumulated other comprehensive

income -7.21 -10.43 -11.10 -2.47 -11.03 -12.70

Retained earnings 35 86 145 197 238 307 302 306 321 313 325 353 399 414 460

Additional paid-in capital 201 160 227 183 110 163

Less: common stock held in treasury,

at cost

Total shareholders' equity 230 236 361 378 338 458 452 456 471 463 476 504 550 564 610

Total liabilities and shareholders' equity 871 1133 1192 1484 1649 2572 2403 2541 2692 3331 3518 3721 3941 4877 5151

Forecasted Dividends (41) (54) (65) (73) (78) (81) (86) (91) (95) (100) (104) (109) (113) (118)

Forecasted NI 50 59 52 41 69 76 90 106 87 112 132 155 128 164

Dividends + NI 9 5 (13) (32) (9) (6) 4 15 (8) 12 28 46 15 46

Difference in Retained Earnings 9 5 (13) (32) (9) (6) 4 15 (8) 12 28 46 15 46



Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Assets

Current assets





Inventories 74 85 90 101 107 313 302 257 257 223 238 251 301 327 349





Non-Current assets



Goodwill 203 214 229 265 287 232 232 232 232 232 232 232 232 232 232


Other assets 10 23 18 29 18 29


Total assets 871 1084 1153 1430 1565 2330 2162 2300 2451 3090 3277 3480 3700 4636 4910


Current liabilities







Long-term debt 477 710 597 845 1007 1726





Common stock 0.48 0.48 0.53 0.53 0.54 0.58


income -7.21 -10.43 -11.10 -2.47 -11.03 -12.70


Additional paid-in capital 201 160 227 183 110 163 147 143 143 171 168 153 167 158 210


at cost




Forecasted NI 50 59 52 41 69 76 90 106 87 112 132 155 128 164

Dividends + NI 9 5 (13) (32) (9) (6) 4 15 (8) 12 28 46 15 46



Statement of Cash Flows

The last of the three financial statements to be forecasted is the the statement of

cash flows. The statement of Cash Flows is divided in 3 sections: Cash flow from

Operating Activities (CFFO), Cash Flows from Investing Activities (CFFI), and Cash Flows

from Financing Activities (CFF).

Figure 3.2 NCFFO Growth

This table traces the different ratios obtained from NCFFO divided by both

sales, Operating Income, and Net Income. It also shows the amount of CFFI as a

percentage of sales and the change in Property, plant, and equipment. Generally,

the changes in accounting principles are not reflected in the statement of cash

flows, because there is no direct connection either to the Balance sheet or the

Income statement, so it is very hard to accurately forecast this statement. In order

to reduce the margin of error, we used NCFFO/sales, NCFFO/Opr. Income, NCFFO/

sales, CFFI/sales, and the change in PPE as approximation tools in order to provide

a accurate forecast of the statement of cash flow. We constructed our forecasting

based on the steps.

2011 2012 2013 2014 2015

NCFFO/sales 0.13 0.16 0.16 0.12 0.13

NCFFO/Opr. Income 0.63 0.67 0.75 0.85 0.75

NCFFO/NI 1.43 1.70 2.20 2.42 1.86

CFFI/sales -62% -12% -36% -20% -92%

change in PPE 43 6 6 47


Consolidated Statements of Cash Flows

(In millions)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Cash flows from operating activities:

Net income $ 50 59 52 41 69 78 70 61 90 78 70 61 90 78 70

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 16 19 24 27 29

Amortization of deferred debt financing costs and bond discount 2 5 4 4 4

Deferred income taxes 15 21 14 29

Interest accretion on contingent consideration 14 0 0

Gain on change in fair value of contingent consideration - 8

Impairment of intangible assets - 1 34

Amortization of acquisition-related inventory step-up - 6

Distribution restructuring fixed asset write-off 0

Loss on disposal of inventory 4 5

Loss on extinguishment of debt 4 10 31 6

Share-based compensation expense - 1 4 4 2 6

Excess tax benefits from share-based compensation 0 - 8 - 4 - 2 - 1

Provision for doubtful accounts 0 0 0 0

Changes in assets and liabilities, net of effects of businesses acquired: - 5

Trade accounts receivable - 1 - 1 - 14 7 - 17

Inventories - 5 - 3 - 4 - 8 40

Prepaid expenses and other current assets - 1 2 - 3 - 5 - 53

Income tax receivable 0 6 5 - 5 14

Other assets 9 0 - 3 - 1 0

Trade accounts payable 1 - 1 9 - 8 8

Accrued expenses - 11 - 5 - 8 - 4 8

Other liabilities - 3 - 3 - 1 0 - 1

Net cash provided by operating activities 72 101 115 99 128 146 167 190 217 247 282 321 366 418

Cash flows from investing activities:

Capital expenditures - 11 - 11 - 15 - 19 - 19

Payments for acquisition of businesses, net of cash acquired - 326 - 63 - 247 - 154 - 874

Net cash used in investing activities - 337 - 73 - 262 - 173 - 892 - 432 - 622 - 896 - 432 - 622 - 896 - 432 - 622 - 896

Cash flows from financing activities:

Repayments of long-term debt - 130 - 117 - 505 - 139 - 19

Proceeds from issuance of long-term debt 372 30 700 299 746

Repayments of borrowings under revolving credit facility - 25 - 5 - 90 - 259 - 164

Borrowings under revolving credit facility 25 105 253 170

Proceeds from issuance of common stock, net 120 126

Payments for repurchase of common stock - 4

Dividends paid - 38 - 50 - 63 - 72 - 78 0 86 91 95 100 104 109 113 118

Excess tax benefits from share-based compensation 1 8 4 2 1

Payments of tax withholding on behalf of employees for net share settlement of share-based compensation - 2 - 11 - 7 - 4 - 2

Debt financing costs - 16 - 1 - 13 - 8 - 15

Net cash provided by (used in) financing activities 183 - 25 132 72 767

Effect of exchange rate fluctuations on cash and cash equivalents 0 0 0 0 0

Net (decrease) increase in cash and cash equivalents - 82 2 - 15 - 3 4

Cash and cash equivalents at beginning of year 99 17 19 4 1

Cash and cash equivalents at end of year$ 17 19 4 1 5

Supplemental disclosures of cash flow information:

Cash interest payments $ 31 54 44 43 47

Cash income tax payments $ 14 10 3 14 9

Non-cash transactions:

Dividends declared and not yet paid $ 11 15 18 18 20

Actual Statements of Cash Flows Forecasted Statements of Cash Flows


The first Step forecasting the statement cash flows is to forecast Cash Flows

from operating activities CFFO. The CFFO from for the last 5 years have been

consistently increasing overall and slightly decreasing for the last 2years. In order

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net income $ 70% 59% 46% 41% 54% 53% 42% 32% 41% 32% 25% 19% 25% 19%


Depreciation and amortization 23% 19% 21% 28% 22%

Amortization of deferred debt financing costs and bond discount 3% 5% 4% 4% 3%

Deferred income taxes 0% 15% 18% 14% 23%

Interest accretion on contingent consideration 19% 0% 0% 0% 0%

Gain on change in fair value of contingent consideration 0% 0% 0% -8% 0%

Impairment of intangible assets -1% 0% 0% 34% 0%

Amortization of acquisition-related inventory step-up 0% 0% 0% 0% -5%

Distribution restructuring fixed asset write-off 0% 0% 0% 0% 0%

Loss on disposal of inventory 5% 0% 0% 5% 0%

Loss on extinguishment of debt 6% 10% 27% 6% 0%

Share-based compensation expense -1% 4% 3% 2% 5%

Excess tax benefits from share-based compensation 0% -8% -4% -2% 0%

Provision for doubtful accounts 0% 0% 0% 0% 0%

Changes in assets and liabilities, net of effects of businesses acquired: -7% 0% 0% 0% 0%

Trade accounts receivable -1% -1% -12% 7% -13%

Inventories -8% -3% -3% -8% 31%

Prepaid expenses and other current assets -2% 2% -2% -5% -41%

Income tax receivable 0% 6% 4% -5% 11%

Other assets 12% 0% -2% -1% 0%

Trade accounts payable 2% -1% 8% -8% 6%

Accrued expenses -16% -5% -7% -4% 7%

Other liabilities -4% -2% -1% 0% -1%

Net cash provided by operating activities 100% 100% 100% 100% 100% 100%100%100%100%100%100%100%100%100%


Capital expenditures 3% 15% 6% 11% 2%

Payments for acquisition of businesses, net of cash acquired 97% 85% 94% 89% 98%

Net cash used in investing activities 100% 100% 100% 100% 100% 100%100%100%100%100%100%100%100%100%


Repayments of long-term debt -71% 472% -383%-194% -2%

Proceeds from issuance of long-term debt 204% -121%531% 418% 97%

Repayments of borrowings under revolving credit facility -14% 20% -68% -361% -21%

Borrowings under revolving credit facility 14% 0% 80% 353% 22%

Proceeds from issuance of common stock, net 0% -486% 0% 0% 16%

Payments for repurchase of common stock -2% 0% 0% 0% 0%

Dividends paid 21% 27% 34% 40% 43%

Excess tax benefits from share-based compensation 1% -32% 3% 3% 0%

Payments of tax withholding on behalf of employees for net share settlement of share-based compensation-1% 43% -5% -6% 0%

Debt financing costs -9% 2% -10% -12%

Net cash provided by (used in) financing activities 100% 100% 100% 100% 100% 100%100%100%100%100%100%100%100%100%

Effect of exchange rate fluctuations on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year$

Forecasted Statements of Cash Flows Actual Statements of Cash Flows


to forecast this part, we needed analyze growth patterns of the Operating activities

and come up with a forecasting reasonable measure for cash flow from Operating

Activities. In order to increase accuracy of forecast, we decided to CFFO as a

percentage of sales, and we noticed that the CFFO were on average increasing by

14% per year.

The second step is to forecast Cash flow from investing activities. The first

thing we’ve noticed is that CFFI/sales was very volatile and that it was very hard

to identify a pattern of Cash flows from investing activities. Based on historical

data, the average in Cash flows from investing activities was roughly 44% increase

on average as a percentage of sales which we used as a forecast measure to

estimate the CFFI over 10 years’ period. We’ve noticed that acquisition of new

business was a major reason for the inconsistency of CFFI. For example, in 2015

CFFI was 892 million compared to 173 million for 2014, capital expenditures

represent only a small portion of CFFI 2.08% in 2015 and 10.98% in 2014.

Finally, the last part of the forecasting the statement of cash flows is

forecasting the dividends. Based on 10 years’ historical data, Dividends have been

consistently increasing, and to forecast dividends paid over the next 10 years we

chose to forecast the dividend payout ratio to improve the accuracy of the dividend

paid forecast.

Forecasted dividend payout per share

2016 2017 2018 2019 2020 2021 2022 2023 2024

1.44 1.52 1.6 1.68 1.76 1.84 1.92 2.00 2.8

Figure 3.3. Forecasted Dividend 2016-2024


We just took the dividend payout forecast for each year that we multiplied

by the net income for each respective forecasted year in order to get the dividend

expense paid each year. Statement from financing is quite hard to forecast, we

had a conservative approach toward the issuance of new shares. Assumption was

that B&G Foods will keep the same number of shares for the forecasted period.

Looking at the Cash flows from financing (CFF), we can conclude that most

of the CFF are highly influenced by the Issuance of debt 203% debt as percentage

of CFF in 2011, 531% in 2013, 418% in 2014, and for equity mainly 486% of CFF

in 2012. We conclude that B&G Foods finance most of the projects with debt. It

would have not been inappropriate not to talk about the past financing approaches

of B&G foods, because Forecasting Cash Flow from financing is very subjective for

the simple reason that it is purely decision and judgments. It does not follow a

particular pattern, because the company adapt itself according to their needs and

future circumstances.

Cost of Capital Estimation

The estimation of the cost of capital is necessary to determine the valuation

of the company’s assets, the expected return on investments, and capital

structure. The cost of capital includes both company’s debt and equity. For an

investor’s perspective, the discounted rate is known as the Weighted Average Cost

of Capital (WACC).

WACC answers how much it costs for a company to obtain their financial

needs. The higher WACC is, the riskier firm’s operations are for an investor.

Therefore, investors would require additional return baring additional risk. On the

other hand, a company might have a very low WACC with a huge debt, leading to


a higher valuation of the shares. It happens, due to the ability of debt to perform

as a tax shield, making cost of debt cheaper than cost of equity.

An estimated WACC of 5% would mean that the company has to pay an

average of five cents for every dollar in extra funding.

To calculate before tax WACC:

WACC = Debt/Assets * Rdebt + Equity/(Assets) * Requity

To calculate after tax WACC:

WACC = Debt/Assets * Rdebt * (1-Tc) + Equity/Assets * Requity

Cost of Debt

According to B&G Foods’s 10-K of 2016, they have four types of long term

debt: revolving credit facility, tranche A, tranche B, and senior notes. The weighted

average annual interest rates for the four types are reported in the last 10-K as

well; they are 2.29%, 2.36%, 3.75%, and 4.625% respectively. In the last column

of the Table 1, these rates are adjusted in accordance with their weight to show

the weighted average rate.

Cost of Debt Amount (in millions) Rate Weight W*R

Revolving credit facility 40.00 2.290% 2.273% 0.052%

Tranche A 273.29 2.360% 15.531% 0.367%

Tranche B 746.33 3.750% 42.414% 1.591%


Senior notes 700.00 4.625% 39.781% 1.840%

Total 1759.62

3.849%

Table 1

Cost of Equity

The Capital Asset Pricing Model (CAPM) is used to calculate the cost of

equity:

Ke = Rf + β * (MRP) + SP

The formula to find cost of equity (Ke) uses the risk free rate (Rf), systematic

risk (β), the market risk premium (MRP), and adds a size premium (SP).

The risk free rate represents the corresponding yields for 1-month, 2-year,

7-year, 10-year, and 20-year treasury bonds. The data is taken from the St. Louis

Federal Reserve website.

1-month regressions

Months Beta

Beta

LB

Beta

UB R^2 SP MRP Rf Ke Ke LB Ke UB

24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 0.00% 1.30% -7.59% 10.19%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 0.00% -0.02% -7.21% 7.18%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 0.00% 1.34% -4.67% 7.34%


60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 0.00% 5.55% 0.46% 10.65%

72 0.41 -0.07 0.90 3.95% 1.80% 9.00% 0.00% 5.53% 1.15% 9.91%

2 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 0.64% 1.94% -6.95% 10.83%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 0.64% 0.62% -6.57% 7.82%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 0.64% 1.98% -4.03% 7.98%

60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 0.64% 6.19% 1.10% 11.29%

72 0.41 -0.07 0.90 3.95% 1.80% 9.00% 0.64% 6.17% 1.79% 10.55%

7 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 1.75% 3.05% -5.84% 11.94%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 1.75% 1.73% -5.46% 8.93%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 1.75% 3.09% -2.92% 9.09%

60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 1.75% 7.30% 2.21% 12.40%

72 0.41 -0.07 0.90 3.95% 1.80% 9.00% 1.75% 7.28% 2.90% 11.66%


10 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.65% 9.00% 2.06% 3.21% -5.68% 12.10%

36 -0.20 -1.00 0.60 0.77% 1.65% 9.00% 2.06% 1.89% -5.30% 9.09%

48 -0.05 -0.72 0.62 0.05% 1.65% 9.00% 2.06% 3.25% -2.76% 9.25%

60 0.42 -0.15 0.98 3.61% 1.65% 9.00% 2.06% 7.46% 2.37% 12.56%

72 0.41 -0.07 0.90 3.95% 1.65% 9.00% 2.06% 7.44% 3.06% 11.82%

20 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 3.00% 4.30% -4.59% 13.19%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 3.00% 2.98% -4.21% 10.18%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 3.00% 4.34% -1.67% 10.34%

60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 3.00% 8.55% 3.46% 13.65%

72 0.414 -0.072 0.901 3.95% 1.80% 9.00% 3.00% 8.53% 4.15% 12.91%

The published beta by Google is also 0.41. It makes us to believe, they are

using last 72 months of S&P 500 and B&G Foods returns to calculate the beta.


To calculate the beta samples (β) for B&G Foods, the S&P 500 rates taken

from Yahoo! Finance were used to determine the market rates and different time

range to give a broad view of the possible systematic risk.

The highest R^2 is highlighted; therefore, the beta of 0.414 will be used.

Using CAPM formula, the cost of equity is 8.53%. The regression shows that with

the 95% confidence, the required rate of return for investors can be estimated to

be between 4.15% and 12.91%. Market risk premium of 9% is used in this

analysis.

To find the size premium for a certain company in terms of their market, the

table 2 is used from the Business Analysis & Valuation textbook.

Size Decile

Market

Value of

Largest

Company

Percent of

Market

Represented

by Decile

Average

Annual

Stock

Return

(%) Beta

Size

Premium

(%)

1 (Smallest) 235.6 1 21 1.41 6.4

2 477.5 1.3 17.2 1.35 2.9

3 771.8 1.7 16.5 1.3 2.7

4 1212.3 2.2 15.4 1.24 1.9

5 1776 2.6 15 1.19 1.8

6 2509.2 3.5 14.8 1.16 1.8


7 3711 4.3 13.9 1.12 1.2

8 6793.9 7.4 13.6 1.1 1

9 15079.5 13.6 12.9 1.03 0.8

10 (largest) 314622.6 62.3 10.9 0.91 -0.4

According to the table, B&G Foods is in the 6th size decile due to their market

value, meaning that we need to use the size premium of 1.8%.

Weighted Average Cost of Capital (WACC)

Using the previously presented formulas for calculating WACC and the

market values of liabilities and equity, the following tables are formed:

Market Value

Amount (in

millions) Rate Weight W*R

Liabilities 1759.62 3.85% 79.359% 3.055%

Equity 457.69 8.53% 20.641% 1.760%

Firm Value 2217.31

WACC 4.815%

WACC after

tax 3.50%

Backdoor Cost of Equity


For an alternative method of cost of equity estimation, we use the

backdoor cost of equity. The formula to find the backdoor cost of equity is:

𝑃𝑟𝑖𝑐𝑒

𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒− 1 =

𝑅𝑂𝐸 − 𝐾𝐸

𝐾𝐸 − 𝑔

To solve for the cost of equity, we transformed the formula above into:

𝑲𝑬 = 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆(𝑹𝑶𝑬 − 𝒈) + 𝒈 ∗ 𝑷𝒓𝒊𝒄𝒆

𝑷𝒓𝒊𝒄𝒆

Compared to the CAPM formula that is based on the historical data in

estimation of the cost of equity, the backdoor cost of equity uses the following

following inputs: current price, book value, return on equity, and the growth

rate. In our return on equity calculation as well as the growth rate estimation,

we used the average of the forecasted next 10 years.

Backdoor cost of equity

Market Cap Book Value P/B ROE g Ke

2730 2572 1.061548422 16.85% 13.77% 16.67%

Due to the fact that B&G Foods had a high ROE and the growth rate, it led

us to forecast the growth rate to be high as well. Since both ROE and the growth


rate are in the formula’s numerator, they both increase the estimation of the cost

of equity.

It creates a huge gap between the CAPM and backdoor cost of equity

methods of estimation of cost of capital. The difference is about 8%, the

estimation using the CAPM method gives the 8.53% cost of equity, whereas the

estimation based on backdoor method provides us with 16.67% cost of equity.

It is more reasonable to use CAPM method, since it takes into account the

systematic risk.

Conclusion

According to B&G Foods’s 10-K, their restated value of liabilities and equity

equal to $2114.03 millions of dollars and $457.69 million respectively. According

to our calculations, the cost of long-term debt is equal to 3.849%. It is the rate

that the company pays for the amount of money they borrowed. Using the CAPM

formula and the beta chosen from the sample created based on the S&P 500

stocks, we calculated the cost of equity that is equal to 8.53%.

The WACC after tax is equal to 3.5%, meaning that the company has to pay

an average of three and a half cents for every dollar in extra funding.



The method of comparables valuation process is widely used to assess the

performance of a firm. This method consists of taking the firm’s computed ratios

and comparing them to their benchmark competitor’s ratios. The ratios used in the

comparison are taken from figures within the last twelve months. One of the

benefits of this valuation method is that the figures are published by the company

and can be accessed easily online. However, because of the relatively small time

period the ratios consider, they must be evaluated frequently.

Through the comparison process we computed B&G Foods’ ratios along with

their benchmark competitors and also the average of these ratios for each firm.

After completing the ratio comparison, we developed an adjusted price per share

(PPS) for the firm.

As Stated Restated











We used 10% as our analyst position for our recommendation on pricing

based on the opening price of $34.51 on April 1, 2016. Any price above $37.96

indicates that the stock is undervalued and any price below $31.06 indicates that

the stock is overvalued. These are the upper and lower limits on the price range

for B&G Foods in the following sections.

Trailing P/E Ratio

The P/E ratio is an informative tool indicating how many years of profits are

being paid. The trailing P/E ratio is a similar ratio that uses the previous twelve

months of earnings in its computation. This is the primary strength of the trailing

P/E ratio because it considers historical prices instead of forecasted figures.

After computing the industry average P/E ratio of $35.70 and multiplying it

by the earnings for B&G Foods, we computed an adjusted price per share of

$43.56. This figure far exceeds the upper limit of $37.96 indicating that the stock

is undervalued. These computations may at times produce inaccurate results due

the the few inputs used however, they should be noted.

Company Price Per Share EPS P/E Trailing Adjusted PPSB&G Foods 34.51 1.22 28.29 43.56

B&G Foods Restated 34.51 1.43 24.13 51.06

Kellog 75.71 1.72 44.02

General Mills 62.9 2.42 25.99

J.M. Smucker Company 129.12 3.48 37.10

Industry Average 35.70

Trailing P/E


Forward P/E Ratio

The forward P/E ratio is similar to the trailing P/E ratio however; it differs in

the fact that it uses earnings forecasts rather than historical figures in its

computation. Due to this computation process the forward P/E ratios accuracy

relies entirely on the accuracy of the forecasts used to compute it. For our

computations we used our forecasting to calculate B&G Foods’ ratio and used

forecasted figures from Yahoo! Finance in the computations of their benchmark

competitors’ ratios.

After computing the industry average using the forward P/E ratio method,

we computed a figure of $19.95. We then took this figure and multiplied it by B&G

Foods’ earnings and determined an adjusted price per earnings of $45.30. This

figure also far exceeds our upper limit of $37.96 indicating that the stock is

undervalued. This figure’s accuracy is dependent on the few inputs used to

compute it and further on the forecasts used in the computation as well.

Price to Book Ratio

The price to book ratio evaluates the relationship between a firm’s market

value and book value per share. The computation involves taking the firm’s price

per share and dividing it by book value per share. A firm’s book value per share is

Company Price Per Share EPS P/E Forward Adjusted PPSB&G Foods 34.51 2.27 15.20 45.30


Kellog 75.71 3.93 19.25




Forward P/E


computed by taking the total book value of equity and dividing it by the total

number of shares outstanding. A low price to book ratio could be indicative of the

firm’s stock being undervalued.

Given the industry average of $4.92, the adjusted figure for B&G Foods is

$40.81. This price exceeds the upper limit of $37.96 meaning that the stock is

considered to be undervalued. Additionally, B&G Foods’ P/B ratio low and below

industry average, this is another indication of the firm’s stock being undervalued.

Dividends to Price Ratio

The dividends to price ratio is computed using the dividends per share

divided by the price per share. This computation indicates the firm’s dividend

payout per share relative to their firm’s stock price. B&G Food’s adjusted price per

share is computed by taking their dividends divided by the average D/P ratio for

the industry.

Company Price Per Share BPS P/B Adjusted PPSB&G Foods 34.51 8.30 4.16 40.81


Kellog 75.71 6.00 12.61




Price to Book

Company Dividends Price Per Share D/P Adjusted PPSB&G Foods 0.42 34.51 0.0122 65.95

Kellog 0.5 75.71 0.0066 78.51




Dividend to Price


After computing the industry average for D/P ratio, it is evident that B&G

Foods’ ratio is well above their competitors and the industry average alike. This

high ratio produces an adjusted price per share of $65.95 which far exceeds the

upper limit of $37.96 indicating that their stock is undervalued. This is a significant

variance which we believe may be caused by special dividends paid by B&G Foods

which are isolated in their occurrence and therefore not included in the

computation.

Price Earnings Growth Ratio

The Price Earnings Growth (PEG) ratio is used to evaluate how much of the

firm’s growth is being paid for and if it is at a discount or premium. This ratio is

computed by taking the P/E ratio and dividing it by the next year’s annual earnings

after factoring in the percent growth rate. This is done by taking the forecasted

income statement and evaluating the growth rate accordingly. A PEG ratio value

greater than one indicates that there is a premium and less than one indicates

there is a discount.

As seen in the table above, we computed an industry-wide average PEG

ratio of 30.29. B&G Foods’ ratio was above the industry average but not by a

significant amount. This above average PEG ratio caused the adjusted price per

Company Trailing P/E EPS Growth P.E.G. Adjusted PPSB&G Foods 34.51 1.07 32.25 39.84


Kellog 75.71 4.57 16.57




P.E.G. Ratio


share to increase to a value of $53.31. This figure is well above the upper limit of

$37.96 indicating that the stock is undervalued.

Price to EBITDA Ratio

The price to EBITDA ratio is a comparable which considers the market

capitalization of a firm divided by the firm’s earnings before interest, taxes,

depreciation, and amortization. This ratio is taken relative to the firm’s market

value of equity which is computed by taking the market price per share and

multiplying by the number of total shares outstanding. This ratio excludes a large

portion of the firm’s expenses and must therefore be considered along with the

other comparables.

As seen above, B&G Foods price to EBITDA ratio falls below the industry

average with a value of 9.60. This causes the adjusted price per share value to be

well above our 10% analyst position upper limit of $37.96 indicating that the stock

is undervalued. This ratio provides a point of reference however; it must be noted

that this figure is computed with the exclusion of many of the firm’s operating

expenses.

Company PPS Market Cap EBITDA P/EBITDA Adjusted PPSB&G Foods 34.51 2,060,000,000.00$ 214,630,000.00$ 9.60$ 44.11$

B&G Foods Restated 34.51 2,060,000,000.00$ 248,970,800.00$ 8.27$ 42.78$

Kellog 75.71 27,010,000,000.00$ 2,020,000,000.00$ 13.37$

General Mills 62.9 25,930,000,000.00$ 3,470,000,000.00$ 7.47$

J.M. Smucker Company 129.12 36,840,000,000.00$ 1,570,000,000.00$ 23.46$

Industry Average 14.77$

Price/EBITDA


Price to Free Cash Flow Ratio

The price to free cash-flow ratio uses the market capitalization of a firm and

takes this figure relative to the firm’s free cash flows. Given the volatility of cash

flows and the difficult nature of forecasting the statement of cash flows, this ratio

must be considered accordingly. Free cash flows are computed by taking the firm’s

cash flows from operating activities (CFFO) plus or minus the firm’s cash flows

from investing activities (CFFI).

Enterprise Value to EBITDA Ratio

The enterprise value to EBITDA ratio takes the firm’s total enterprise value relative

to their earnings before interest, taxes, depreciation and amortization. The firm’s

enterprise value is computed by taking their market equity value plus book value of

liabilities less cash and investments. Similar to the price to EBITDA ratio, this ratio does

not account for many of the firm’s expenses or capital structure therefore it should be

interpreted with other comparables rather than alone.

Company PPS Market Cap F.C.F. P/FCFPS Adjusted PPSB&G Foods 34.51 2,060,000,000.00$ 111,128,479.00$ 18.54 18.54

Kellog 75.71 27,010,000,000.00$ 1,690,000,000.00$ 15.98 15.98

General Mills 62.9 25,930,000,000.00$ 2,840,000,000.00$ 9.13

J.M. Smucker Company 129.12 36,840,000,000.00$ 1,340,000,000.00$ 27.49


Price/Free Cash Flows

Company Market Cap EV EBITDA EV/EBITDA Adjusted PPSB&G Foods 2,060,000,000.00$ 3,620,000,000 214,630,000.00$ 16.87 31.18

B&G Foods Restated 2,060,000,000.00$ 3,620,000,000 240,385,600.00$ 15.06 29.37

Kellog 27,010,000,000.00$ 34,290,000,000 2,020,000,000.00$ 16.98

General Mills 25,930,000,000.00$ 45,030,000,000 3,470,000,000.00$ 12.98

J.M. Smucker Company 36,840,000,000.00$ 20,390,000,000 1,570,000,000.00$ 12.99


Enterprice Value/EBITDA


As seen above, the industry average for price to EBITDA ratio is 14.31. B&G

Foods’ ratio of 16.87 is slightly above the industry average however, it is not higher

by much. The slight variance from the industry average is within the 10% range

of our analyst position. This slight variance produces an adjusted price per share

of $31.18 indicating that the stock is fairly valued.

Discounted Dividend Model

The discounted dividend model takes estimated future dividends, discounts

them back to present value, and sums the results to value a stock. The discounted

dividend model does not account for returns on capital gains. Therefore, this model

works best for companies that distribute a significant amount of dividends

regularly. This is due to the fact that the discounted dividends model discounts

back the dividends per share. If this number is relatively low, the resulting stock

price will be unrealistically low. When discounting B&G Foods dividends, we found

that a relatively high amount of the stock price was supported by the model.

We implemented the next ten years of forecasted dividends into the model.

These dividends resulted from a stair-step function that utilized the average eight

cent dividend growth per year to grow the future dividends by (refer to figure 3.6).

After the ten year dividend forecast, we implemented a perpetuity to find the value

of the dividends from 11 years onward. We grew the perpetuity at 4% which was

based off of the forecasted long-run sales growth. We then found the implied

January 2016 price of the stock by adding the discounted dividends and perpetuity.

We did not have to move this stock price forward as B&G Foods’ fiscal year begins

on January 2nd.


We calculated upper and lower bound cost of equity for our sensitivity

analysis as well as numerous perpetuity growth rates. With the upper bound, lower

bound, and growth rates calculated we could now compare the results of the model

with the observed share price of $34.51 on 1/1/2016.

B&G Foods Discounted Dividend Model

2.0% 3.0% 4.0% 5.0% 6.0%

7.13% 57.31 68.57 87.34 124.88 155.84

7.83% 44.44 49.80 57.31 68.57 87.34

8.53% 37.29 40.42 44.44 49.80 57.31

9.23% 32.74 34.79 37.29 40.42 44.44

9.93% 29.59 31.04 32.74 34.79 37.29

Overvalued 10% LB 10% UB Undervalued

red $31.06 $37.96 Green

After implementing the lower and upper bounds, we are able to conclude

that B&G Foods is undervalued. As the cost of equity decreases, our model

becomes increasingly more sensitive to changes in the growth rate. With our

growth rate of 4% and cost of equity of 8.53%, 86% of our stock price is supported

by the model.


Discounted Free Cash Flow Model

The next intrinsic model that we use to estimate the value of B&G Foods is

the discounted free cash flows model (DCF). This model has an assumption that

the market value of equity might be found using the following formula:

MVEquity = MVAssets - MVLiabilities

While this is a theoretical formula, it is not always correct in the reality.

Further, we assume the market value of liabilities to be equal to the book value

of a company. The market value of assets represents the present value of all

future free cash flows.

Similar to the discounted dividends model, the DCF is subject for the

forecasting errors due to the fact that there is a limited number of variations in

capital expenditures.

We used forecasted cash flows of the next 10 years from operating and

capital expenditures. Using the weighted average cost of capital, we get present

values of free cash flows. From year 11, we value a perpetuity using WACC and

the growth rate.


Free Cash Flow Model


2.82% 3.82% 4.82% 5.82% 6.82%

Perpetuity

Growth rate

0.50% 18.85 11.78 7.36 4.60 2.88

1.00% 25.71 16.07 10.04 6.28 3.92

1.50% 34.98 21.86 13.66 8.54 5.34

2.00% 72.64 45.40 28.38 17.73 11.08

2.50% 836.24 64.23 30.23 16.32 12.45


red $31.06 $37.96 green

The free cash flow model suggests that the price of B&G Foods is

overvalued. However, the model is highly responsive to the changes in the WACC

and growth rates. This might be a problem since the forecasts are subject to

estimation errors. Another problem is the high volatility of cash flows. Since the

cash flows are often volatile, it worsens the ability to create an accurate forecast.

Due to the low explanatory power of the model, it will not play as a

significant factor in our valuation process comparing to the residual income and

long run residual income models.


Residual Income Model

The residual Income model is one of the most effective valuation model

which provide a good descriptive power when valuating companies. This valuation

model is based on the analysis of revenues after dividends. This model focusses

significantly on the forecasted Earnings and dividend, and less on the influence of

the present value of the perpetuity. The reason for that being is that forecasting

is more accurate in the short rather than the long term, because simply the level

of risk and uncertainty is higher as the time span increases. Thus, this model shows

a good degree accuracy while used valuating a firm.

To start using the model, we need first to calculate residual income for each

year over the period we wish to valuate and forecast. We took net income (NI) of

B&G Foods that we subtracted the annual normal income benchmark (NI*). if NI-

NI*>0, then the residual income is positive. If NI-NI*<0, then residual income is

negative. A positive residual income shows that the company earned more than

his required rate of return, if not, they earned less and are not meeting the

expectations.

Using a cost of capital of 8.53%, we then bring value of the residual income

each year to time 0 dollars (Present value). We also calculated the present of the

terminal value of the perpetuity that we brought to time 0 dollars. Furthermore,

we summed B&G foods book value of equity with the year by year PV of the

residual income and the present value of the terminal value of the perpetuity,

which helped us obtain the market value of the firm’s equity. Then, we divided the

Market value of equity by the numbers of shares outstanding in order to get the

valuation price per share. In order to run the model under different scenarios, we

decided to set the perpetuity growth rate of 2%, 3%, 4%, 5%, and 6%. B&G


Foods cost of capital calculated was 8.53%, we chose another set of close values:

7.13%, 7.83%, 9.13%, and 9.93% to have a grasp of the prices’ distribution with

respect of the upper and Lower bounds.

Under those assumptions (cost of capital and growth rate), we notice that

14 observed prices were falling below the low bound of $31.06, 5 were falling

between the lower $31.06 and upper range $37.96, and finally 6 observed prices

falling over the upper bond. According to the model, we observed a maximum

price of $85.13 and a minimum price of $22.45. We can now conclude that

depending of the assumptions this model suggests that B&G Foods’ stock price is

mainly overvalued. We believe the overvaluation of their stock price could be due

to the fact that for the last three years (2013, 2014, 2015), the dividends they

paid were higher than their net income. Regardless of the fact that B&G Foods

doesn’t want to cut dividends to avoid sending negative signals to the market,

paying dividends higher than your net income is nevertheless not sustainable in

the long term. It could be a signal of a troublesome situation within the company.


Long Run Residual Income Model

Our last intrinsic valuation model is the long run residual income model.

This model calculates how B&G Foods will affect the shareholder’s wealth using

value creation by taking initial inputs. Compared to the residual income model,

the long run residual income model can operate without annual forecasts of the

net income in the process of calculating the annual residual income.

The inputs that we used are growth rate, cost of equity, average return on

equity, and the current book value of equity.

The formula of the long run residual income is:

MVE = BVE0 [1 + ((ROE – KE) / (KE – g))]


ROE (constant) Growth Rate (varies)

20.44%

-10% -20% -30% -40% -50%

Cost of

Equity

(varies)

7.13% 27.75 32.56 37.48 42.52 47.65

7.83% 26.63 30.88 35.24 39.72 44.29

8.53% 25.69 29.47 33.37 37.38 41.48

9.23% 24.9 28.28 31.78 35.39 39.1

9.93% 24.21 27.26 30.42 33.68 37.05


red $31.06 $37.96 green



Growth rate (constant) Return on Equity (varies)

-30%

14.44% 17.44% 20.44% 23.44% 26.44%

Cost of

Equity

(varies)

7.13% 24.975 29.304 33.732 38.268 42.885

7.83% 23.967 27.792 31.716 35.748 39.861

8.53% 23.121 26.523 30.033 33.642 37.332

9.23% 22.41 25.452 28.602 31.851 35.19

9.93% 21.789 24.534 27.378 30.312 33.345


red $31.06 $37.96 green


Cost of equity (constant)

= 8.53% Return on Equity (varies)

14.44% 17.44% 20.44% 23.44% 26.44%

Growth rate

(varies)

-10.00% 30.525 35.816 41.228 46.772 52.415

-20.00% 29.293 33.968 38.764 43.692 48.719

-30.00% 28.259 32.417 36.707 41.118 45.628

-40.00% 27.39 31.108 34.958 38.929 43.01

-50.00% 26.631 29.986 33.462 37.048 40.755


red $31.06 $37.96 green


After analyzing the long run residual income model, we came to the

conclusion that B&G Foods is slightly overvalued, based on the dominant

presence of lower bound results.

Intrinsic Valuation Model Conclusion

Despite that the fact that the models rely on the forecasted data, each of

them gives a signal as to whether the price is over or undervalued. All of the

intrinsic valuation models result in an overvalued estimation of the B&G Foods’

share price except the discounted dividends model. The discounted dividends

model estimates the company as undervalued because the terminal value of the

perpetuity is high. The models suggest that people are overvaluing B&G Foods,

believing in the future growth opportunities.


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http://www.businessdictionary.com/definition/value-creation.html#ixzz3yyYXSDVO

http://www.businessdictionary.com/definition/value-creation.html#ixzz3yyYXSDVO

http://www.wisegeek.com/what-is-product-diversification.htm

http://www.wisegeek.com/what-is-a-supply-contract.htm

http://www.investopedia.com/terms/o/operatinglease.asp#ixzz41nQ1CkBh

https://www.csrhub.com/CSR_and_sustainability_information/BandG-Foods-Inc/

https://www.csrhub.com/CSR_and_sustainability_information/BandG-Foods-Inc/

http://www.ncbi.nlm.nih.gov/books/NBK220409/

http://www.sec.gov/Archives/edgar/data/1278027/000104746915001636/a2223296z10-k.htm

http://www.sec.gov/Archives/edgar/data/1278027/000104746915001636/a2223296z10-k.htm

http://www.sec.gov/Archives/edgar/data/40704/000119312514260716/d749341d10k.htm

http://www.sec.gov/Archives/edgar/data/40704/000119312514260716/d749341d10k.htm

http://www.sec.gov/Archives/edgar/data/88948/000008894814000013/a10k033114.htm

http://www.sec.gov/Archives/edgar/data/88948/000008894814000013/a10k033114.htm

http://www.forbes.com/sites/stevedenning/2014/09/10/whats-the-future-of-the-food-industry/#49ee0f801fde

http://www.forbes.com/sites/stevedenning/2014/09/10/whats-the-future-of-the-food-industry/#49ee0f801fde

http://topics.bloomberg.com/food-industry/


Appendix


Figures In Millions2011 (As stated) Dr. Cr. 2011 (Restated) Change in NI

Assets

Current Assets:

Cash & Short Term $ 16.74 16.74$






Equipment $ 61.93

61.93$


Goodwill 267.94$ 53.58$ 267.94$ 214.36$

Total Assets $ 1,130.00 1,130.00$ 1,076.42$

-$


Equity -$









Total Shareholders'

Equity $ 235.55

235.55$

Total Equity $ 235.55 235.55$


Liabilities &


1,130.00$ 1,074.42$

Balance SheetYears Ended December 31st



Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 19.22

19.22$






Equipment $ 104.75

104.75$


Goodwill 282.38$ 53.58$ 282.38$ 228.80$

Total Assets $ 1,190.00 1,190.00$ 1,136.42$

-$


Equity -$









Total Shareholders'

Equity $ 361.18

361.18$

Total Equity $ 361.18 361.18$


Liabilities &


1,190.00$ 1,121.97$



Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 4.11

4.11$


Inventories $ 101.25 101.25$




Equipment $ 110.37

110.37$


Goodwill 318.97$ 53.58$ 318.97$ 265.39$

Total Assets $ 1,480.00 1,480.00$ 1,426.42$

-$


Equity -$









Total Shareholders'

Equity $ 378.36

378.36$

Total Equity $ 378.36 378.36$


Liabilities &


1,480.00$ 1,375.39$



Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 1.49

1.49$


Inventories $ 106.56 106.56$




Equipment $ 116.20

116.20$


Goodwill 340.15$ 53.58$ 340.15$ 286.57$

Total Assets $ 1,650.00 1,650.00$ 1,596.42$

-$


Equity -$









Total Shareholders'

Equity $ 338.00

338.00$

Total Equity $ 338.00 338.00$


Liabilities &


1,650.00$ 1,558.36$



Assets -$

Current Assets: -$

Cash & Short Term

Investments $ 5.25

5.25$


Inventories $ 312.88 312.88$




Equipment $ 163.64

163.64$


Goodwill 285.40$ 53.58$ 285.40$ 231.82$

Total Assets $ 2,570.00 2,570.00$ 2,516.42$

-$


Equity -$









Total Shareholders'

Equity $ 457.69

457.69$

Total Equity $ 457.69 457.69$


Liabilities &


2,570.00$ 2,498.96$


Liquidity Ratios

Current Ratio

Quick Asset Ratio Current Ratio

2011 2012 2013 2014 2015

B&G Foods 2.09 1.57 1.72 2.12 3.43

Kellogg 0.91 0.75 0.85 0.77 0.56

The J.M. Smucker 3.39 2.66 2.67 1.73 2.01


Industry 1.87 1.49 1.51 1.36 1.69

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Current ratio

2011 2012 2013 2014 2015

B&G Foods 0.78 0.60 0.63 0.62 0.56

Kellogg 0.21 0.12 0.16 0.18 0.11

The J.M. Smucker 1.60 1.11 1.09 0.68 0.87


Industry 0.81 0.60 0.60 0.50 0.50

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Quick asset ratio


Operating Efficiency Ratios

Inventory Turnover


2011 2012 2013 2014 2015

B&G Foods 4.30 4.57 4.76 5.63 2.16

Kellogg 7.11 6.42 6.96 7.44 7.08

The J.M. Smucker 3.51 3.83 4.09 3.84 3.20


Industry 5.12 5.50 5.79 6.08 5.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Inventory Turnover

2011 2012 2013 2014 2015

B&G Foods 84.98 79.81 76.67 64.80 168.74

Kellogg 51.35 56.86 52.42 49.05 51.59

The J.M. Smucker 104.12 95.36 89.17 94.93 114.05


Industry 76.56 70.72 66.99 64.53 95.63

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00





2011 2012 2013 2014 2015

B&G Foods 13.78 14.62 11.55 15.16 13.86

Kellogg 11.11 9.76 10.39 11.43 10.06

The J.M. Smucker 14.01 15.90 18.80 18.13 13.24


Industry 12.93 13.22 13.26 14.20 12.47

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00


2011 2012 2013 2014 2015

B&G Foods 26.49 24.97 31.60 24.07 26.33

Kellogg 32.85 37.38 35.14 31.94 36.27

The J.M. Smucker 26.05 22.95 19.41 20.13 27.58


Industry 28.48 28.58 28.96 26.59 29.72

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00



Cash to Cash Cycle

Working Capital Turnover Ratio

2011 2012 2013 2014 2015

B&G Foods 111.47 104.78 108.26 88.87 195.07

Kellogg 84.21 94.24 87.56 81.00 87.86

The J.M. Smucker 130.17 118.31 108.59 115.06 141.62


Industry 105.04 99.30 95.95 91.12 125.35

0.00

50.00

100.00

150.00

200.00

250.00

Cash to Cash Cycle

2011 2012 2013 2014 2015

B&G Foods 6.94 10.60 9.54 8.17 2.94

Kellogg -46.15 -12.42 -26.04 -14.24 -5.40

The J.M. Smucker 4.18 5.38 5.91 8.66 5.53

General Mills Inc. 61.29 -109.74 -17.86 -17.39 -15.96

Industry 6.56 -26.54 -7.11 -3.70 -3.22

-120.00

-100.00

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

Working Capital Turnover


Profitability Ratios

Gross Profit Margin


2011 2012 2013 2014 2015

B&G Foods 33% 35% 34% 29% 30%

Kellogg 39% 38% 41% 35% 35%

The J.M. Smucker 37% 33% 34% 36% 35%


Industry 37% 36% 36% 34% 33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%Gross Profit Margin

2011 2012 2013 2014 2015

B&G Foods 21% 24% 21% 14% 18%

Kellogg 11% 11% 19% 7% 8%

The J.M. Smucker 26% 21% 24% 26% 21%


Industry 19% 19% 20% 16% 15%

Restated 10% 13% 10% 11% 12%

0%

5%

10%

15%

20%

25%

30%



Net Profit Margin

Asset Turnover Ratio

2011 2012 2013 2014 2015

B&G Foods 9% 9% 7% 5% 7%

Kellogg 7% 7% 12% 4% 5%

The J.M. Smucker 10% 8% 9% 10% 6%


Industry 9% 8% 10% 7% 6%

Restated 3% 5% 3% 5% 5%

0%

2%

4%

6%

8%

10%

12%

14%

Net Profit Margin

2011 2012 2013 2014 2015

B&G Foods 0.53 0.55 0.54 0.54 0.46

Kellogg 1.04 0.98 0.93 0.97 0.96

The J.M. Smucker 0.58 0.61 0.65 0.62 0.34


Industry 0.74 0.73 0.73 0.72 0.64

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Asset Turnover


Return on Assets

Return on Equity

2011 2012 2013 2014 2015

B&G Foods 5% 5% 4% 3% 3%

Kellogg 7% 8% 12% 4% 4%

The J.M. Smucker 6% 5% 6% 6% 2%


Industry 7% 6% 8% 5% 4%

Return on Assets 2% 3% 3% 2% 2%

0%

2%

4%

6%

8%

10%

12%

14%

Return on Assets

2011 2012 2013 2014 2015

B&G Foods 27% 25% 14% 11% 20%

Kellogg 40% 55% 73% 18% 22%

The J.M. Smucker 9% 9% 11% 11% 5%


Industry 26% 27% 30% 16% 17%

Return on Equity 17% 18% 12% 5% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Return on Equity


Capital Structure Ratios

Debt to Equity

Times Interest Earned

2011 2012 2013 2014 2015

B&G Foods 3.81 2.30 2.92 3.88 4.62

Kellogg 5.75 5.15 3.29 4.31 6.17

The J.M. Smucker 0.57 0.77 0.75 0.80 1.38


Industry 2.99 2.49 2.19 2.72 3.68

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Debt to Equity Ratio (total liabilities)

2011 2012 2013 2014 2015

B&G Foods 2.89 2.87 2.83 2.79 2.32

Kellogg 6.12 5.98 12.07 4.90 4.81

The J.M. Smucker 10.30 8.62 8.75 10.70 6.55


Industry 6.67 6.30 7.91 6.79 4.82

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Times Interest Earned Ratio


Altman’s Z-Score


2011 2012 2013 2014 2015

B&G Foods 1.62 2.14 1.86 1.65 1.40

Kellogg 3.99 3.41 4.09 3.87 3.92

The J.M. Smucker 1.20 1.17 1.28 1.21 0.66


Industry 2.73 2.63 2.81 2.71 2.49

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Altman's Z-Score

2011 2012 2013 2014 2015

B&G Foods 8% 12% 13% 14% 12%

Kellogg 56% 37% 44% 44% 43%

The J.M. Smucker 10% 11% 12% 12% 7%


Industry 31% 27% 29% 30% 29%

0%

10%

20%

30%

40%

50%

60%




Forecasted Income Statement

2011 2012 2013 2014 2015

B&G Foods 5% 2% -4% -8% -3%

Kellogg 14% 21% 48% 0% -2%

The J.M. Smucker 13% 13% 15% 16% 16%


Industry 12% 11% 18% 4% 4%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%



Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 513 544 634 725 848 966 1082 1201 1322 1454 1599 1759 1935 2128 2341 2575


Gross Profit 168 178 223 243 248 290 346 420 383 436 512 616 561 638 749



Net Income 32 50 59 52 41 69 76 90 106 87 112 132 155 128 164


Dividends Forecast

In Percentage of Sales Actual Financial Statement Forecasted Financial Statement

Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


Gross Profit 33% 33% 35% 34% 29% 30% 32% 35% 29% 30% 32% 35% 29% 30% 32%



Net Income 6% 9% 9% 7% 5% 7% 7% 8% 8% 6% 7% 8% 8% 6% 7%


Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 513 544 634 725 848 966 1082 1201 1322 1454 1599 1759 1935 2128 2341 2575


Gross Profit 168 178 223 243 248 290 346 420 383 436 512 616 561 638 749



Net Income 32 15 29 20 42 46 58 36 66 87 48 88 116 64 117

In Percentage of Sales Restated Financial Statement Forecasted Financial Statement

Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%


Gross Profit 33% 33% 35% 34% 29% 30% 32% 35% 29% 30% 32% 35% 29% 30% 32%



Net Income 6% 3% 5% 3% 5% 5% 5% 3% 5% 6% 3% 5% 6% 3% 5%

Forecasted Dividends 2016 2017 2018 2019 2020 2021 2022 2023 2024

Per Share 1.44 1.52 1.60 1.68 1.76 1.84 1.92 2.00 2.08


Forecasted Balance Sheet


Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Assets

Current assets





Inventories 74 85 90 101 107 313 302 257 257 223 238 251 301 327 349





Non-Current assets



Goodwill 203 263 268 319 370 473 473 473 473 473 473 473 473 473 473


Other assets 10 23 18 29 18 29


Total assets 871 1133 1192 1484 1649 2572 2403 2541 2692 3331 3518 3721 3941 4877 5151


Current liabilities







Long-term debt 477 710 597 845 1007 1726





Common stock 0.48 0.48 0.53 0.53 0.54 0.58


income -7.21 -10.43 -11.10 -2.47 -11.03 -12.70


Additional paid-in capital 201 160 227 183 110 163


at cost




Forecasted NI 50 59 52 41 69 76 90 106 87 112 132 155 128 164

Dividends + NI 9 5 (13) (32) (9) (6) 4 15 (8) 12 28 46 15 46



Statement of Cash Flows


Year Ended Jan 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Assets

Current assets





Inventories 74 85 90 101 107 313 302 257 257 223 238 251 301 327 349





Non-Current assets



Goodwill 203 214 229 265 287 232 232 232 232 232 232 232 232 232 232


Other assets 10 23 18 29 18 29


Total assets 871 1084 1153 1430 1565 2330 2162 2300 2451 3090 3277 3480 3700 4636 4910


Current liabilities







Long-term debt 477 710 597 845 1007 1726





Common stock 0.48 0.48 0.53 0.53 0.54 0.58


income -7.21 -10.43 -11.10 -2.47 -11.03 -12.70


Additional paid-in capital 201 160 227 183 110 163 147 143 143 171 168 153 167 158 210


at cost




Forecasted NI 50 59 52 41 69 76 90 106 87 112 132 155 128 164

Dividends + NI 9 5 (13) (32) (9) (6) 4 15 (8) 12 28 46 15 46



2011 2012 2013 2014 2015

NCFFO/sales 0.13 0.16 0.16 0.12 0.13

NCFFO/Opr. Income 0.63 0.67 0.75 0.85 0.75

NCFFO/NI 1.43 1.70 2.20 2.42 1.86

CFFI/sales -62% -12% -36% -20% -92%

change in PPE 43 6 6 47


Consolidated Statements of Cash Flows

(In millions)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Cash flows from operating activities:

Net income $ 50 59 52 41 69 78 70 61 90 78 70 61 90 78 70


Depreciation and amortization 16 19 24 27 29

Amortization of deferred debt financing costs and bond discount 2 5 4 4 4

Deferred income taxes 15 21 14 29

Interest accretion on contingent consideration 14 0 0

Gain on change in fair value of contingent consideration - 8

Impairment of intangible assets - 1 34

Amortization of acquisition-related inventory step-up - 6

Distribution restructuring fixed asset write-off 0

Loss on disposal of inventory 4 5

Loss on extinguishment of debt 4 10 31 6

Share-based compensation expense - 1 4 4 2 6

Excess tax benefits from share-based compensation 0 - 8 - 4 - 2 - 1

Provision for doubtful accounts 0 0 0 0

Changes in assets and liabilities, net of effects of businesses acquired: - 5

Trade accounts receivable - 1 - 1 - 14 7 - 17

Inventories - 5 - 3 - 4 - 8 40

Prepaid expenses and other current assets - 1 2 - 3 - 5 - 53

Income tax receivable 0 6 5 - 5 14

Other assets 9 0 - 3 - 1 0

Trade accounts payable 1 - 1 9 - 8 8

Accrued expenses - 11 - 5 - 8 - 4 8

Other liabilities - 3 - 3 - 1 0 - 1

Net cash provided by operating activities 72 101 115 99 128 146 167 190 217 247 282 321 366 418


Capital expenditures - 11 - 11 - 15 - 19 - 19

Payments for acquisition of businesses, net of cash acquired - 326 - 63 - 247 - 154 - 874

Net cash used in investing activities - 337 - 73 - 262 - 173 - 892 - 432 - 622 - 896 - 432 - 622 - 896 - 432 - 622 - 896


Repayments of long-term debt - 130 - 117 - 505 - 139 - 19

Proceeds from issuance of long-term debt 372 30 700 299 746

Repayments of borrowings under revolving credit facility - 25 - 5 - 90 - 259 - 164

Borrowings under revolving credit facility 25 105 253 170

Proceeds from issuance of common stock, net 120 126

Payments for repurchase of common stock - 4

Dividends paid - 38 - 50 - 63 - 72 - 78 0 86 91 95 100 104 109 113 118

Excess tax benefits from share-based compensation 1 8 4 2 1

Payments of tax withholding on behalf of employees for net share settlement of share-based compensation - 2 - 11 - 7 - 4 - 2

Debt financing costs - 16 - 1 - 13 - 8 - 15

Net cash provided by (used in) financing activities 183 - 25 132 72 767

Effect of exchange rate fluctuations on cash and cash equivalents 0 0 0 0 0

Net (decrease) increase in cash and cash equivalents - 82 2 - 15 - 3 4

Cash and cash equivalents at beginning of year 99 17 19 4 1

Cash and cash equivalents at end of year$ 17 19 4 1 5

Supplemental disclosures of cash flow information:

Cash interest payments $ 31 54 44 43 47

Cash income tax payments $ 14 10 3 14 9

Non-cash transactions:

Dividends declared and not yet paid $ 11 15 18 18 20

Actual Statements of Cash Flows Forecasted Statements of Cash Flows


.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Net income $ 70% 59% 46% 41% 54% 53% 42% 32% 41% 32% 25% 19% 25% 19%


Depreciation and amortization 23% 19% 21% 28% 22%

Amortization of deferred debt financing costs and bond discount 3% 5% 4% 4% 3%

Deferred income taxes 0% 15% 18% 14% 23%

Interest accretion on contingent consideration 19% 0% 0% 0% 0%

Gain on change in fair value of contingent consideration 0% 0% 0% -8% 0%

Impairment of intangible assets -1% 0% 0% 34% 0%

Amortization of acquisition-related inventory step-up 0% 0% 0% 0% -5%

Distribution restructuring fixed asset write-off 0% 0% 0% 0% 0%

Loss on disposal of inventory 5% 0% 0% 5% 0%

Loss on extinguishment of debt 6% 10% 27% 6% 0%

Share-based compensation expense -1% 4% 3% 2% 5%

Excess tax benefits from share-based compensation 0% -8% -4% -2% 0%

Provision for doubtful accounts 0% 0% 0% 0% 0%

Changes in assets and liabilities, net of effects of businesses acquired: -7% 0% 0% 0% 0%

Trade accounts receivable -1% -1% -12% 7% -13%

Inventories -8% -3% -3% -8% 31%

Prepaid expenses and other current assets -2% 2% -2% -5% -41%

Income tax receivable 0% 6% 4% -5% 11%

Other assets 12% 0% -2% -1% 0%

Trade accounts payable 2% -1% 8% -8% 6%

Accrued expenses -16% -5% -7% -4% 7%

Other liabilities -4% -2% -1% 0% -1%

Net cash provided by operating activities 100% 100% 100% 100% 100% 100%100%100%100%100%100%100%100%100%


Capital expenditures 3% 15% 6% 11% 2%

Payments for acquisition of businesses, net of cash acquired 97% 85% 94% 89% 98%

Net cash used in investing activities 100% 100% 100% 100% 100% 100%100%100%100%100%100%100%100%100%


Repayments of long-term debt -71% 472% -383%-194% -2%

Proceeds from issuance of long-term debt 204% -121%531% 418% 97%

Repayments of borrowings under revolving credit facility -14% 20% -68% -361% -21%

Borrowings under revolving credit facility 14% 0% 80% 353% 22%

Proceeds from issuance of common stock, net 0% -486% 0% 0% 16%

Payments for repurchase of common stock -2% 0% 0% 0% 0%

Dividends paid 21% 27% 34% 40% 43%

Excess tax benefits from share-based compensation 1% -32% 3% 3% 0%

Payments of tax withholding on behalf of employees for net share settlement of share-based compensation-1% 43% -5% -6% 0%

Debt financing costs -9% 2% -10% -12%

Net cash provided by (used in) financing activities 100% 100% 100% 100% 100% 100%100%100%100%100%100%100%100%100%

Effect of exchange rate fluctuations on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year$

Forecasted Statements of Cash Flows Actual Statements of Cash Flows


Cost of Capital Estimation

Cost of Debt Amount (in millions) Rate Weight W*R

Revolving credit facility 40.00 2.290% 2.273% 0.052%

Tranche A 273.29 2.360% 15.531% 0.367%

Tranche B 746.33 3.750% 42.414% 1.591%

Senior notes 700.00 4.625% 39.781% 1.840%

Total 1759.62

3.849%

Table 2

Cost of Equity

1-month regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 0.00% 1.30% -7.59% 10.19%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 0.00% -0.02% -7.21% 7.18%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 0.00% 1.34% -4.67% 7.34%

60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 0.00% 5.55% 0.46% 10.65%

72 0.41 -0.07 0.90 3.95% 1.80% 9.00% 0.00% 5.53% 1.15% 9.91%

2 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 0.64% 1.94% -6.95% 10.83%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 0.64% 0.62% -6.57% 7.82%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 0.64% 1.98% -4.03% 7.98%

60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 0.64% 6.19% 1.10% 11.29%


72 0.41 -0.07 0.90 3.95% 1.80% 9.00% 0.64% 6.17% 1.79% 10.55%

7 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 1.75% 3.05% -5.84% 11.94%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 1.75% 1.73% -5.46% 8.93%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 1.75% 3.09% -2.92% 9.09%

60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 1.75% 7.30% 2.21% 12.40%

72 0.41 -0.07 0.90 3.95% 1.80% 9.00% 1.75% 7.28% 2.90% 11.66%

10 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.65% 9.00% 2.06% 3.21% -5.68% 12.10%

36 -0.20 -1.00 0.60 0.77% 1.65% 9.00% 2.06% 1.89% -5.30% 9.09%

48 -0.05 -0.72 0.62 0.05% 1.65% 9.00% 2.06% 3.25% -2.76% 9.25%

60 0.42 -0.15 0.98 3.61% 1.65% 9.00% 2.06% 7.46% 2.37% 12.56%

72 0.41 -0.07 0.90 3.95% 1.65% 9.00% 2.06% 7.44% 3.06% 11.82%

20 year regressions

Months Beta

Beta

LB

Beta


24 -0.06 -1.04 0.93 0.06% 1.80% 9.00% 3.00% 4.30% -4.59% 13.19%

36 -0.20 -1.00 0.60 0.77% 1.80% 9.00% 3.00% 2.98% -4.21% 10.18%

48 -0.05 -0.72 0.62 0.05% 1.80% 9.00% 3.00% 4.34% -1.67% 10.34%

60 0.42 -0.15 0.98 3.61% 1.80% 9.00% 3.00% 8.55% 3.46% 13.65%

72 0.414 -0.072 0.901 3.95% 1.80% 9.00% 3.00% 8.53% 4.15% 12.91%


Size Decile

Market

Value of

Largest

Company

Percent of

Market

Represented

by Decile

Average

Annual

Stock

Return

(%) Beta

Size

Premium

(%)

1 (Smallest) 235.6 1 21 1.41 6.4

2 477.5 1.3 17.2 1.35 2.9

3 771.8 1.7 16.5 1.3 2.7

4 1212.3 2.2 15.4 1.24 1.9

5 1776 2.6 15 1.19 1.8

6 2509.2 3.5 14.8 1.16 1.8

7 3711 4.3 13.9 1.12 1.2

8 6793.9 7.4 13.6 1.1 1

9 15079.5 13.6 12.9 1.03 0.8

10 (largest) 314622.6 62.3 10.9 0.91 -0.4

Table 3


Market Value

Amount (in

millions) Rate Weight W*R

Liabilities 1759.62 3.85% 79.359% 3.055%

Equity 457.69 8.53% 20.641% 1.760%

Firm Value 2217.31

WACC 4.815%

WACC after

tax 3.50%


SUMMARY OUTPUT

Regression Statistics

Multiple R 0.02481904

R Square 0.00061598

Adjusted R Square -0.0448106

Standard Error 0.07891173

Observations 24

ANOVA

df SS MS F Significance F

Regression 1 8.4439E-05 8.4439E-05 0.01356002 0.90835438

Residual 22 0.13699536 0.00622706

Total 23 0.13707979

CoefficientsStandard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0%

Intercept 0.01627878 0.01624374 1.00215731 0.32716363 -0.0174087 0.04996623 -0.0174087 0.04996623

X Variable 1 -0.0554728 0.47637614 -0.1164475 0.90835438 -1.0434165 0.93247085 -1.0434165 0.93247085

SUMMARY OUTPUT



R Square 0.00768018



Observations 36

ANOVA


Regression 1 0.0015192 0.0015192 0.263147 0.61128344

Residual 34 0.19628934 0.00577322

Total 35 0.19780854


Intercept 0.01580523 0.01301843 1.21406575 0.23308847 -0.0106514 0.04226185 -0.0106514 0.04226185

X Variable 1 -0.2018272 0.39344177 -0.5129786 0.61128344 -1.0013971 0.59774268 -1.0013971 0.59774268


SUMMARY OUTPUT



R Square 0.00052676



Observations 48

ANOVA


Regression 1 0.00012582 0.00012582 0.02424377 0.87694754

Residual 46 0.23873935 0.00518999

Total 47 0.23886517


Intercept 0.01927063 0.01078715 1.78644243 0.0806193 -0.0024428 0.04098404 -0.0024428 0.04098404

X Variable 1 -0.0516402 0.33165628 -0.1557041 0.87694754 -0.7192297 0.61594922 -0.7192297 0.61594922

SUMMARY OUTPUT



R Square 0.03608721

Adjusted R Square 0.01946802


Observations 60

ANOVA


Regression 1 0.01268706 0.01268706 2.17141841 0.14600341

Residual 58 0.33887953 0.00584275

Total 59 0.35156658


Intercept 0.01698294 0.01009642 1.68207485 0.09793139 -0.0032272 0.03719313 -0.0032272 0.03719313

X Variable 1 0.41688671 0.2829087 1.47357335 0.14600341 -0.1494166 0.98319 -0.1494166 0.98319



SUMMARY OUTPUT



R Square 0.03954012

Adjusted R Square 0.02581926


Observations 72

ANOVA


Regression 1 0.017763 0.017763 2.88175329 0.09403042

Residual 70 0.431477 0.00616396

Total 71 0.44924


Intercept 0.02255437 0.00947906 2.37939 0.02007114 0.00364899 0.04145976 0.00364899 0.04145976

X Variable 1 0.41420864 0.24400052 1.69757277 0.09403042 -0.0724351 0.90085234 -0.0724351 0.90085234

As Stated Restated











Trailing P/E Ratio

Forward P/E Ratio

Price to Book Ratio

Company Price Per Share EPS P/E Trailing Adjusted PPSB&G Foods 34.51 1.22 28.29 43.56


Kellog 75.71 1.72 44.02




Trailing P/E

Company Price Per Share EPS P/E Forward Adjusted PPSB&G Foods 34.51 2.27 15.20 45.30


Kellog 75.71 3.93 19.25




Forward P/E

Company Price Per Share BPS P/B Adjusted PPSB&G Foods 34.51 8.30 4.16 40.81


Kellog 75.71 6.00 12.61




Price to Book


Dividends to Price Ratio

Price Earnings Growth Ratio

Price to EBITDA Ratio

Company Dividends Price Per Share D/P Adjusted PPSB&G Foods 0.42 34.51 0.0122 65.95

Kellog 0.5 75.71 0.0066 78.51




Dividend to Price

Company Trailing P/E EPS Growth P.E.G. Adjusted PPSB&G Foods 34.51 1.07 32.25 39.84


Kellog 75.71 4.57 16.57




P.E.G. Ratio

Company PPS Market Cap EBITDA P/EBITDA Adjusted PPSB&G Foods 34.51 2,060,000,000.00$ 214,630,000.00$ 9.60$ 44.11$

B&G Foods Restated 34.51 2,060,000,000.00$ 248,970,800.00$ 8.27$ 42.78$

Kellog 75.71 27,010,000,000.00$ 2,020,000,000.00$ 13.37$

General Mills 62.9 25,930,000,000.00$ 3,470,000,000.00$ 7.47$

J.M. Smucker Company 129.12 36,840,000,000.00$ 1,570,000,000.00$ 23.46$

Industry Average 14.77$

Price/EBITDA


Price to Free Cash Flow Ratio

Enterprise Value to EBITDA Ratio

Discounted Dividend Model

B&G Foods Discounted Dividend Model

2.0% 3.0% 4.0% 5.0% 6.0%

7.13% 57.31 68.57 87.34 124.88 155.84

7.83% 44.44 49.80 57.31 68.57 87.34

8.53% 37.29 40.42 44.44 49.80 57.31

9.23% 32.74 34.79 37.29 40.42 44.44

9.93% 29.59 31.04 32.74 34.79 37.29


Company PPS Market Cap F.C.F. P/FCFPS Adjusted PPSB&G Foods 34.51 2,060,000,000.00$ 111,128,479.00$ 18.54 18.54

Kellog 75.71 27,010,000,000.00$ 1,690,000,000.00$ 15.98 15.98

General Mills 62.9 25,930,000,000.00$ 2,840,000,000.00$ 9.13

J.M. Smucker Company 129.12 36,840,000,000.00$ 1,340,000,000.00$ 27.49


Price/Free Cash Flows

Company Market Cap EV EBITDA EV/EBITDA Adjusted PPSB&G Foods 2,060,000,000.00$ 3,620,000,000 214,630,000.00$ 16.87 31.18

B&G Foods Restated 2,060,000,000.00$ 3,620,000,000 240,385,600.00$ 15.06 29.37

Kellog 27,010,000,000.00$ 34,290,000,000 2,020,000,000.00$ 16.98

General Mills 25,930,000,000.00$ 45,030,000,000 3,470,000,000.00$ 12.98

J.M. Smucker Company 36,840,000,000.00$ 20,390,000,000 1,570,000,000.00$ 12.99


Enterprice Value/EBITDA


red $31.06 $37.96 Green

Discounted Free Cash Flow Model

Free Cash Flow Model


2.82% 3.82% 4.82% 5.82% 6.82%

Perpetuity

Growth rate

0.50% 18.85 11.78 7.36 4.60 2.88

1.00% 25.71 16.07 10.04 6.28 3.92

1.50% 34.98 21.86 13.66 8.54 5.34

2.00% 72.64 45.40 28.38 17.73 11.08

2.50% 836.24 64.23 30.23 16.32 12.45


red $31.06 $37.96 green

Tomy’s section



ROE (constant) Growth Rate (varies)

20.44%

-10% -20% -30% -40% -50%

7.13% 27.75 32.56 37.48 42.52 47.65

7.83% 26.63 30.88 35.24 39.72 44.29


Cost of

Equity

(varies)

8.53% 25.69 29.47 33.37 37.38 41.48

9.23% 24.9 28.28 31.78 35.39 39.1

9.93% 24.21 27.26 30.42 33.68 37.05


red $31.06 $37.96 green


Growth rate (constant) Return on Equity (varies)

-30%

14.44% 17.44% 20.44% 23.44% 26.44%

Cost of

Equity

(varies)

7.13% 24.975 29.304 33.732 38.268 42.885

7.83% 23.967 27.792 31.716 35.748 39.861

8.53% 23.121 26.523 30.033 33.642 37.332

9.23% 22.41 25.452 28.602 31.851 35.19

9.93% 21.789 24.534 27.378 30.312 33.345


red $31.06 $37.96 green



Cost of equity (constant)

= 8.53% Return on Equity (varies)

14.44% 17.44% 20.44% 23.44% 26.44%

Growth rate

(varies)

-10.00% 30.525 35.816 41.228 46.772 52.415

-20.00% 29.293 33.968 38.764 43.692 48.719

-30.00% 28.259 32.417 36.707 41.118 45.628

-40.00% 27.39 31.108 34.958 38.929 43.01

-50.00% 26.631 29.986 33.462 37.048 40.755


red $31.06 $37.96 green

Equity Analysis and Valuation of B&G Foods, Inc.

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Transcript of Equity Analysis and Valuation of B&G Foods, Inc.