BRID - Bridgford Foods: Looking To Exploit The Disconnect

2023-07-03 11:30:51 ET

Summary

• Bridgford Foods Corporation has made massive progress over the years, and thanks to the company's hidden value in real estate, fiscal 2022 was the firm's best year in its nearly 100-year history.
• In 2000, Bridgford Foods initiated a large 2 million share buyback due to perceived undervaluation, with only 120,000 shares currently remaining for repurchase.
• Due to the 2022 sale of a meat processing plant in downtown Chicago, purchased in 1975 for $500,000 and sold for $60,000,000, shareholders' equity increased by 68%, long-term debt fell from $36 million to $3.89 million, and cash increased from zero to $16 million.
• Bridgford Foods Corporation shares are selling at an extreme bargain of 39% of annual sales and 80% shareholders' equity.
• The lower Bridgford Foods Corporation share prices drops, the higher the probability the company will go private.

I have a long history with Bridgford Foods Corporation (BRID). I don't want to date myself, but I bought my first position back in 1990. Since then, I have attended several annual meetings, been in constant contact with senior management and even attempted my hand at shareholder activism by placing an ad in Investor's Business Daily, touting the extreme bargain value the shares registered in 2007. The company's mantra is simple. It deems itself "the premium brand."

Back in 2000, the company felt their shares were so undervalued that they embarked on a massive 2 million share buyback. Today, only 120,000 shares remain available for repurchase.

Massive progress has been achieved: thanks to the company's hidden value in real estate, fiscal 2022 was the firm's best year in its nearly 100-year history. That was the year that the company monetized one of its prime assets - its downtown Chicago meat processing plant. Having purchased the plant in 1975 for a mere $500,000, they were able to sell it to developer for $60,000,000.

That single act allowed them to increase their shareholder's equity (aka book value) a staggering 68% from $74,978,000 to $126,325,000. In addition, it reduced its long-term debt from $36 million to $3.89 million and advanced its cash from nil to $16 million. On the earnings front, the company earned $45,066,000 versus a loss of $5,503,000 (note the bulk of the improvement was based on the large gain associated with the real estate transaction).

The company is enthused about their new presence in the convenience store market. Just three years ago, BRID had virtually no sales in that segment. In fiscal 2021, the company generated revenues of $5.80 million in that arena, and their latest fiscal year ratcheted up sales another 41% to $8.20 million. In addition, the snack food purveyors' hand in shelf stable sandwiches has been buoyed by increased demand for military ration applications pertaining to the Ukraine war. In fact, EnWave Corporation (NWVCF) just signed a licensing contract with Bridgford that will surely bolster this endeavor.

In its latest quarter ( fiscal 2023 second quarter) , additional improvements were evident: (1) SG&A expenses fell 1.60%; (2) interest expense dived from $318,000 to $100,000; (3) Walmart, as a percentage of BRID's total sales rose 30 basis points from 30.50% to 30.80% while its second largest single customer, Dollar General generated a 50 basis point gain, from 19.60% to 20.10%; (4) although total sales fell 7%, BRID was able to maintain its gross profit margin of 27.80%. That's a pretty impressive feat, when also taking in consideration the stubbornly high prices of beef, pork and wheat, exacerbated by the Ukraine War; (5) shareholders equity rose over $1 million from $126,325,000 to $127,406,000; and (6) earnings per share nosedived from 9 cents to 2 cents (the not so good news).

Real estate holdings shine. They include the following locations: (1) its new state of the art meat processing plant has enabled a threefold increase in production. This facility is situated on 8 acres (near the old Chicago Stockyards) and possesses a 177,000 sf facility; (2) its 100,000 sf plant (5 acres) Anaheim, California; (3) three Dallas Texas plants, comprising of a total of 7 acres and 140,000 sf of building capacity (note: the company transferred its corporate headquarters there last year); and (4) a 42,000 sf building on 8 acres in Statesville, North Carolina.

Prime real estate: Its real estate footprint is quite impressive, to say the least: What is the market value of this real estate? I can assure you it is far above what Bridgford has recorded in the asset section under "plant, property and equipment" of its balance sheet. That figure is a mere $70,357,000 and reflects a deduction for accumulated depreciation and amortization of $67,657,000. The bottom line? The real estate alone could be worth more than $200 million, which amounts to nearly double the company's current market cap. It is hidden value on the balance sheet which could always be unlocked and monetized.

Could Bridgford Foods go private? The chances are good. Management has expressed to me, they were regretful that they didn't take this action when the share price was substantially lower. By doing so, BRID could cut its administrative costs and eliminate the burdens imposed on public companies. No more SEC filings, no need to be transparent, no annoying shareholders to deal with. They currently do not even provide press releases. In addition, trade secrets could be easier to shroud. Why is this probable? Because the Bridgford family already controls 80.70% of the 9,076,832 shares outstanding. They are also firmly embedded in leadership with over 15 family members (now 5th generation emerging) holding top positions.

That insinuates only 1,750,388 shares would have to be acquired from outside shareholders. If you place a typical 50% tender offer premium on the shares, that equates to a mere $35 million necessary to pay off the remaining shareholders. The family has the financing abilities, to easily make that happen. A more than realistic undertaking, to say the least. A private company once again?

Just four years ago, the stock price was as high as $35. Today, it sits barely above its five year low of $10.90 despite being a much stronger company today. This is certainly a situation where inefficiencies in an efficient market can be exploited. There is a definite disconnect between reality and how Wall Street is pricing these shares. Why does the Street have so much disdain for this stock? I have no clue, but I view it as extremely intriguing and opportunistic. There is absolutely no doubt, I hope for the day when the "premium brand" company becomes the "premium stock" company.

Will the stock repurchase plan swung back into action? It sure needs to be. It would send a signal to Wall Street that management believes their shares are vastly undervalued and warrant confidence and investment. What better investment is there, than investing in yourself? With just 120,000 shares remaining, the company has plenty of cash to purchase this balance. It would cost them a tiny $1,350,000 to do so. That's less than the cost of most houses in Southern California. The problem is, they have a rule in place that does not allow share purchase if the stock price is over $10 per share. This fact was originally relayed to me by the brokerage company BRID hired to perform its stock purchases in the open market. My opinion? They need to up that amount immediately, as that figure was derived over twenty years ago. It is simply no longer relevant or feasible.

The problem of buying and selling this stock: it is difficult to buy shares and difficult to sell shares, because the float is so little. Average volume is a mere 3,500 shares and the two largest institutional holders (per Whalewisdom.com) (Dimensional Fund Advisors and Neuberger Berman Group own just 2% and 1%, respectively). Perhaps that is one of the reasons, BRID has never finished its buyback program. It is simply too hard to buy without pushing up the shares artificially.

Bottom line: The company needs to reinitiate their stock repurchase program, go private, or start paying a cash dividend. These actions would provide immediate benefit and relief to outside shareholders who have been more than patient (although frustrated) these past decades. If any of these actions occur, I'm sure all the inefficiencies of this very undervalued stock would be obliterated, and the stock price would finally shine.

The time to buy Bridgford Foods Corporation stock is now. It will be too late once Wall Street finally gets wise to the opportunity in this freak of a stock. It could rise so fast, that buying low will be out of the question.

The risk/reward ratio seems quite favorable at this juncture. The downside risk seems limited versus the upside reward. The main caveat is the possibility the company remains in the status quo and does not change its efforts to be more shareholder friendly. If that's the case, the shares could languish for years to come.

For further details see: