Earnings

Critical Comparison: Treehouse Foods, Inc. (THS) vs. B&G Foods, Inc. (BGS)

Treehouse Foods, Inc. (NYSE:THS) shares are down more than -40.07% this year and recently increased 0.42% or $0.18 to settle at $43.26. B&G Foods, Inc. (NYSE:BGS), on the other hand, is down -23.40% year to date as of 11/13/2017. It currently trades at $33.55 and has returned 1.98% during the past week.

Treehouse Foods, Inc. (NYSE:THS) and B&G Foods, Inc. (NYSE:BGS) are the two most active stocks in the Processed & Packaged Goods industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect THS to grow earnings at a 2.75% annual rate over the next 5 years. Comparatively, BGS is expected to grow at a 3.89% annual rate. All else equal, BGS’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 18.56% for B&G Foods, Inc. (BGS). THS’s ROI is -2.50% while BGS has a ROI of 7.30%. The interpretation is that BGS’s business generates a higher return on investment than THS’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. THS’s free cash flow (“FCF”) per share for the trailing twelve months was -1.65. Comparatively, BGS’s free cash flow per share was -0.89. On a percent-of-sales basis, THS’s free cash flow was -1.53% while BGS converted -4.25% of its revenues into cash flow. This means that, for a given level of sales, THS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. THS has a current ratio of 2.20 compared to 3.20 for BGS. This means that BGS can more easily cover its most immediate liabilities over the next twelve months. THS’s debt-to-equity ratio is 1.04 versus a D/E of 2.34 for BGS. BGS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

THS trades at a forward P/E of 15.48, a P/B of 0.95, and a P/S of 0.38, compared to a forward P/E of 14.95, a P/B of 2.82, and a P/S of 1.38 for BGS. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. THS is currently priced at a -14.73% to its one-year price target of 50.73. Comparatively, BGS is -12.72% relative to its price target of 38.44. This suggests that THS is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for THS and 2.20 for BGS, which implies that analysts are more bullish on the outlook for THS.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. THS has a beta of 0.70 and BGS’s beta is 0.13. BGS’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. THS has a short ratio of 7.31 compared to a short interest of 13.63 for BGS. This implies that the market is currently less bearish on the outlook for THS.

Summary

B&G Foods, Inc. (NYSE:BGS) beats Treehouse Foods, Inc. (NYSE:THS) on a total of 8 of the 14 factors compared between the two stocks. BGS has a higher cash conversion rate, is more profitable, generates a higher return on investment, has higher cash flow per share and higher liquidity. Finally, SJM has better sentiment signals based on short interest.

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