BRID - Bridgford Foods

[rist.tom]

Just posted my analysis of this under-followed stock on SeekingAlpha and it was selected as PRO article.  Non-subscribers can view it for 30 days.  Would love to hear others' thoughts.  https://seekingalpha.com/article/4136716-bridgford-foods-unlocking-hidden-value-asset-worth-50-percent-market-cap

[DTEJD1997]

The article is well done.

 

HOWEVER:

 

All serious investors have known about the property in Chicago since the mid 90's at least.  There have been numerous articles/analysis done through the decades that mention this.  Nothing has been done about it...although it appears they are making progress on it?  I don't think the Bridgford family is in any hurry.  Their timeline for development may be RADICALLY different than shareholders.

 

I think the assumptions for the real estate are a bit too optimistic...but then I am always pessimistic about valuations.

[rist.tom]

Thanks for the reply.  A few comments:

• While the Chicago property has always been valuable, I think the value has risen dramatically in the last few years due to West Loop real estate boom.  I live 2 blocks away and walk by the Bridgford facility everyday on my way to work.  It's definitely out of place for the area, which has been overtaken by restaurants, retail, and multi-million dollar condos.  If you don't believe me, check this out https://chicago.curbed.com/maps/west-loop-development-chicago-map 
  
• They are making a ton of progress on it.  The 2016 annual report mentioned that they were exploring options and that it might take multiple years (setting reasonable expectations), but they have already obtained approval for a zoning change, purchased a new facility, and have begun operations in that facility in July 2017.  Looks like they are moving faster than even they anticipated. 
  
• The valuation of the real estate is the biggest question mark here.  I tried to use market data the best I could to make assumptions, but it might be optimistic...especially if there's a downturn in the economy. 

In any case though, with the price of everything else in market, I don't think it's a bad place to put some money and see what happens over the next couple of years.  There doesn't seem to be much downside considering they have no debt and their profitable operating business should be fairly recession proof.

[rist.tom]

10-K released on Friday after the bell.  https://www.sec.gov/Archives/edgar/data/14177/000149315218000507/form10-k.htm.  A few highlights:

• Q4 revenue was up 32% YOY led by the Snack Foods segment (cured meats jerky, sausage, pepperoni), which was up 43% in top line sales.  Snack Foods is now 71%
  of their total revenue.
  
• Full year earnings were up 14% to $8.8 million (0.97/share).
  
• Shareholder's equity increased 44% YoY to $56 million.
  
• The biggest risk I see to their operating business is the increasing reliance on Wal-Mart, which is now 38% of their revenues.  I don't have any experience working with them, but they have a reputation for squeezing every last dime out of their suppliers, although Bridgford seems to be doing quite well with the relationship so far.  It says on their website that they won an award from Wal-Mart for being the Merchandising Strategy Partner of the Year in Packaged Foods.
  
• No comments on the sale of the old Chicago facility/real estate or any update on the new facility other than the previously disclosed fact that it commenced operations on July 27, 2017.  We did learn that it is 177,000 sq ft (larger than the old facility at 156,000).  Hopefully they'll provide an update when they release their annual report, which typically includes a 1 page letter to the shareholders from the Executive Committee.
  

[Okonomen]

Aren't their margins quite low (~5% profit margin) and very dependent on food commodity prices? I see big risks here. And I do not fancy the valuation approach that much in the article. Just putting 15x operating earnings as a value is not so convincing to me. What are their free cash flow streams and what do we pay for these?

[gg]

@rist.tom -- I don't have a Seeking Alpha account, so can't see the whole article -- what's the valuation that you're putting on the West Loop building?

 

@DTEJD -- The area that the property is in (Chicago's West Loop) has seen property values go up enormously over the past few years. Sort of similar to NYC's meatpacking district, where a bunch of food industry warehouse buildings have now been rehabbed and getting tenants like Google and McDonalds (HQ, not restaurant). Tons of expensive condos in the area now too. So even if the building was known to be part of the balance sheet since the 90s, it would not have had the insane appreciation during that time frame...

 

Here's the sale of the Google building in 2016, and things have only continued for the better in that neighborhood

http://www.chicagobusiness.com/realestate/20160628/CRED03/160629825/googles-fulton-market-offices-selling-for-305-million

 

 

[Foreign Tuffett]

Tom, thanks for the interesting idea.

 

It's a pass for me for the following reasons:

 

Family controlled business with lots of family members working and "consulting" for the company. That means the odds of them selling out, even if offered an attractive price, is very low.

 

Nearly 40% of the workforce is unionized

 

Underfunded pension to the tune of $14.2 million.

 

There's not much disclosure about why the snack foods division has grown significantly over the past two years. Could it be a fairly pedestrian business that's overearning based on where we are in the input cycle?

 

Per the 10-K, new products "have not contributed significantly to our revenue growth." I don't think the Bridgford name has much, if any brand equity, as evidenced by my continually spelling it "Bridgeford" despite having purchased some of their meat snack products in the past.

 

[rist.tom]

@Okonomen - Yes, their net profit margins are ~5% and are subject to commodity price fluctuation (they don't participate in futures or hedging).  As stated in the risk factors section of their 10-K, "Our operating results are heavily dependent upon the prices paid for raw materials. The marketing of our value-added products does not lend itself to instantaneous changes in selling prices. Changes in selling prices are relatively infrequent and do not compare with the volatility of commodity markets. While fluctuations in significant cost structure components, such as ingredient commodities and fuel prices, have had a significant impact on profitability over the last three years, the impact of general price inflation on our financial position and results of operations has not been significant. Future volatility of general price inflation or deflation and raw material cost and availability could adversely affect our financial results."

 

@gg - I use 2 different valuation methods to arrive at valuations between $50-$100 million.  Creating an account with SeekingAlpha is easy if you would like to know more.  Note that my article is only available to the public for 30 days (from the release date) since it was selected for PRO (their premium subscription). 

 

@Foreign Tuffett - Thanks for the comments, all are valid risks/negatives.  I agree that the family is very unlikely to sell, but two more likely scenarios which would benefit minority shareholders are: 1) Payment of a large special dividend if they sell the Chicago real estate (say $5/share) or 2) A going-private transaction where they have a tender offer ~30% above the market price to buy out minority shareholders.  They currently have 810 shareholders and the SEC generally wants less than 500 for companies to go private.  I'm not sure they'll do number 2, since being public seems to be part of their legacy and a source of pride (the founder took them public in the 60s I think).

 

I also wish they had better shareholder relations.  The only subjective comments about performance come annually in the one page shareholder letter that get posted as part of the annual report on their website.  Over the past few years, they have attributed the tremendous growth of the snack foods division to a rebranding of their products as "The Premium Brand", expansion of stores/distribution (especially discount chains), and a successful partnership/sponsorships with many bass fishing professionals.  As I mentioned in previous comment, it also appears that Wal-Mart has been a big sales driver for them (now 38% of sales).  This has lowered their average selling price by a few basis points, but has dramatically increased sales.  The big question is whether they will be able to sustain profitability if/when commodity prices increase.

[rb]

@gg - I use 2 different valuation methods to arrive at valuations between $50-$100 million.  Creating an account with SeekingAlpha is easy if you would like to know more.  Note that my article is only available to the public for 30 days (from the release date) since it was selected for PRO (their premium subscription). 

Or as a board member you could post your valuation in this thread on CoBF instead of promoting your seeking alpha article.

[simple]

I read your article, thanks, and the latest 10-K.

 

Gross margins have dropped a bit, Walmart is a dominant customer that doesn't always play nice, and the family ownership made me wonder a few too many times. I am international so it's hard to get a good sense of the value of the real estate.

 

These were the paragraphs in the 10-K that caught my attention:

 

Although we have recently introduced several new products, most of these products have not contributed significantly to our revenue growth for the fiscal year 2017 [hard to know what to make of this - so recent that haven't yet contributed, or have they flopped?]

 

Sales to Wal-Mart® comprised 37.7% of revenues in fiscal year 2017 and 36.9% of total accounts receivable was due from Wal-Mart® as of November 3, 2017. Sales to Wal-Mart® comprised 34.8% of revenues in fiscal year 2016 and 35.6% of total accounts receivable was due from Wal-Mart® as of October 28, 2016.

 

Members of the Bridgford family beneficially own, in the aggregate, more than 80% of our outstanding stock. In addition, three members of the Bridgford family currently serve on the Board of Directors. As a result, members of the Bridgford family have the ability to exert substantial influence or actual control over our management and affairs and over substantially all matters requiring action by our shareholders, including amendments to by-laws, election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions.

 

The gross margin earned in this segment decreased from 40.5% to 36.1% during fiscal year 2017 primarily as a result of lower per pound selling prices.

 

Real estate consultant and Board member Keith Ross currently provides consulting services to the Board and management. He was paid a fee of $2,100 for each Board meeting attended during fiscal year 2017 for a total of $17,700 during fiscal year 2017. Total fees paid during fiscal year 2017 for consulting services were $324,000.

[rist.tom]

This is now trading around $30/share ($265 million market cap), which is over a 100% increase from Jan 2018.  I'm completely out of this position now, since it is well above my fair value estimate.  The Chicago real estate is probably worth between $50-100 million and a lot of that cash flow is going towards transitioning to the new facility.  The business is profitable, but struggled this year and only produced $6.5 million in pre-tax operating income in 2018. Not exactly cheap at this price.

 

Annual 10-K was just released (https://www.sec.gov/Archives/edgar/data/14177/000149315219000765/form10-k.htm). Revenue up 4% YoY, but operating income and net income (excluding one-time events) were down over 40%. The large drop in operating income was consistent across both divisions: frozen and snacking. This past year really highlighted the fragility of the business. They're essentially a commodity business because they don't have much pricing power (highly competitive) and have lots of exposure to commodity input costs, which took a toll on their gross margins. I've also anecdotally noticed increased competition in the cured meats snacking business, especially jerky.

 

One potential positive is that they're spending quite a bit on the new Chicago facility ($18 million in capex last year), which could lead to lower operational costs in the future if they're investing in new equipment (higher capacity?) and a more efficient layout. The current Chicago West Loop facility is over 50 years old and has multiple floors...it probably wasn't optimally designed for their current needs.

[Faustus]

Looks like the building sold for $60MM

 

https://www.chicagobusiness.com/commercial-real-estate/big-fulton-market-site-set-sell-60-million