Calculating the fair value of B&G Foods, Inc. (NYSE:BGS)

Key findings

• The projected fair value for B&G Foods is $9.51 based on the dividend discount model
• The current share price of $8.32 suggests that B&G Foods may be trading close to its fair value
• The analyst price target of $9.43 for BGS is comparable to our fair value estimate.

Today we’ll run through a simple valuation method that can be used to estimate the attractiveness of B&G Foods, Inc. (NYSE:BGS) as an investment opportunity. To do this, we’ll take the expected future cash flows and discount them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one of them. If you want to learn more about intrinsic value, you should check out Simply Wall St’s analysis model.

Check out our latest analysis for B&G Foods

Processing the numbers

We need to calculate the value of B&G Foods a little differently than other stocks because it’s a food company. This approach uses dividends per share (DPS) because free cash flow is difficult to estimate and often goes unreported by analysts. This often underestimates a stock’s value, but it can still be good as a comparison to competitors. It uses the “Gordon Growth Model,” which simply assumes that dividend payments will continue to grow forever at a sustainable growth rate. For a number of reasons, it uses a very conservative growth rate that cannot exceed that of a company’s gross domestic product (GDP). In this case, we used the 5-year average of the 10-year Treasury bond yield (2.4%). The expected dividend per share is then discounted to today’s value using a cost of equity of 6.1%. Relative to the current share price of $8.3, the company seems about fairly valued at a 12% discount to the current share price. However, ratings are imprecise instruments, much like a telescope: move a few degrees and you end up in a different galaxy. Keep that in mind.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= $0.8 / (6.1% – 2.4%)

= 9.5 US dollars

Important assumptions

We would like to point out that the main inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. The DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider B&G Foods as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 6.1%, which is based on a leveraged beta of 0.800. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for B&G Foods

Go on:

While the DCF calculation is important, ideally it shouldn’t be the only analysis you look at for a company. It’s not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For B&G Foods, we’ve put together three additional elements for you to consider:

1. Risks: For example, we discovered 3 warning signs for B&G Foods (1 is a bit uncomfortable!) that you should know before investing here.
2. Future income: How is BGS’ growth rate compared to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of ​​what else you might be missing out on!

PS. Simply Wall St updates its DCF calculation for every American stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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