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

Key findings

• Using the dividend discount model, the estimated fair value of B&G Foods is $9.51

• The current share price of $7.84 suggests that B&G Foods may be trading close to its fair value.

• Analysts’ price target for BGS is $9.71, 2.2% above our fair value estimate.

Today we’ll go over one way to estimate the intrinsic value of B&G Foods, Inc. (NYSE:BGS) by estimating the company’s future cash flows and discounting them to their present value. This is done using the Discounted Cash Flow (DCF) model. Models like this may seem incomprehensible to a layperson, but they’re relatively easy to follow.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. For those who enjoy stock analysis, the analysis model from Simply Wall St listed here might be of interest.

Check out our latest analysis for B&G Foods

What is the estimated value?

Because B&G Foods operates in the food sector, we need to calculate intrinsic value a little differently. Rather than using free cash flows, which are difficult to estimate and often unreported by analysts in this industry, we use dividend payments per share (DPS). Unless a company pays out most of its free cash flow as dividends, this method will typically underestimate the value of the stock. We use the Gordon growth model, which assumes that the dividend will grow at a sustainable rate over time. For a number of reasons, a very conservative growth rate is used, which 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%. Compared to the current share price of $7.8, the company appears to be roughly fairly valued at an 18% discount to the current share price. However, keep in mind that this is only an approximate valuation and that, as with any complex formula, where there’s garbage in, there’s garbage out.

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

= 0.8 US dollars / (6.1% – 2.4%)

= 9.5 US dollars

Important assumptions

We would like to point out that the key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. 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 a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

The story goes on

SWOT Analysis for B&G Foods

Strength

weakness

Opportunity

Danger

Go on:

Valuation is only one side of the coin when developing your investment thesis and should not be the only metric you consider when researching a company. The DCF model is not a perfect tool for stock valuation. Instead, a DCF model is best used 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 valuation. For B&G Foods, we have compiled three relevant points that you should examine in more detail:

1. Risks: For example, we found 3 warning signs for B&G Foods (1 is a bit uncomfortable!) that you need to consider before investing here.

2. management:Have insiders increased their shares to capitalize on market sentiment regarding BGS’s future prospects? Read our management and board analysis with insights into CEO compensation and governance factors.

3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS The Simply Wall St app runs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment solely on 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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