FLO - Flowers Foods: Sturdy Stock At Two-Year Low

2023-08-31 00:23:39 ET

Summary

• Flowers Foods, a packaged bakery goods producer in the USA, is trading at a two-year low but has shown resilience and exceeded Q2 2023 expectations.
• The company has a diverse product portfolio, strong brands, and pricing strategies that have led to an improved FY 2023 outlook.
• Despite inflationary pressure and declining volume sold, the stock is trading below its average price target, has a consistent dividend, and a history of stable results.

Flowers Foods, Inc. ( FLO ), the second-largest packaged bakery goods producer in the USA, is currently trading at a two-year low. Despite industry challenges, the company has shown resilience, boosting its financial performance while investing in growth opportunities, including recent acquisitions . Through diverse products, strong brands, and pricing strategies, the company exceeded Q2 2023 EPS and revenue expectations, leading to an improved FY 2023 outlook. Shareholders have enjoyed a decade of consistent dividend growth, and the stock has yielded a 11.92% return over the same period.

Despite ongoing inflationary pressure and a decline in volume sold, investors may want to take a bullish stance on this stock as it is currently trading below its average Wall Street price target of $26.83 , has a consistent dividend and has a long history of delivering stable results.

Company overview

Flowers Foods, Inc., established in 1919 in Thomasville, Georgia, stands as one of the largest bakeries in the USA, expanding its footprint to encompass 46 bakeries and a network of distribution centres nationwide. The company's core revenue generation is through bakery product production, marketing, and distribution. Its extensive product portfolio spans an array of bakery items such as bread, buns, rolls, tortillas, and snack cakes. These offerings reach consumers through diverse distribution channels, including retail, food service, and convenience stores. Its notable brands are Nature's Own, Dave's Killer Bread, Wonder, Canyon Bakehouse, and Tastykake.

Flowers Foods has grown through several acquisitions over the years to expand its market presence and product portfolio. Some notable acquisitions, including Papa Pita, most recently for $270 million, were acquired in 2023 , adding manufacturing and distribution synergies.

Other impactful acquisitions were Dave's Killer Bread, acquired in 2015 for $275 million to increase its presence in organic and specialty bread, and Tasty Baking Company, acquired in 2011 for $175 million to expand its snacks, cakes and baked goods offerings.

Q2 2023 sales growth and FY 2023 outlook

In 2022, total sales were $4.8 billion, making it one of the largest producers of packaged baked goods. The company benefits from a large and stable bakery market, which stood at $28 billion in 2022 and is expected to grow to $110 billion by 2028. The company benefits from strong brands that customers are willing to pay higher prices across various categories.

In Q2 2023, Flowers Foods observed declining volume sold due to inflationary pressures and changing consumer behaviours. However, revenue has increased due to pricing actions. The company generates revenue through Branded retail and Other. Branded retail focuses on innovations and higher-margin products, while the Other category includes branded retail and non-retail sales such as food service, restaurants, thrift stores and contract manufacturing. Flowers Foods' growth is driven by innovation in product offerings to meet changing consumer demands, expansion into new markets, strategic acquisitions to broaden its brand portfolio, and a strong distribution network that helps ensure its products reach a wide range of consumers.

During the latest earnings call, the company's management shared their forecast for sales, estimating it will be between $5.095 billion and $5.141 billion. This reflects a growth of 6.0% to 7.0% YoY. Additionally, they anticipate that the adjusted diluted EPS(2) will be around $1.18 to $1.25.

Financials and valuation

In Q2 2023, Flowers Foods had a solid financial performance, with net sales increasing by 8.8% YoY to $1.228 billion. This was mainly due to higher pricing strategies and the acquisition of Papa Pita. Net income also increased by 18.8% YoY to $63.8 million, and the company delivered an EPS of $0.30 for the quarter. Looking at the company's revenue and gross profit, we can see a steady upward trend over the past five years, and net income has been increasing over the last three years.

There are concerns about this company's financial situation due to its significant debt, which currently stands at $1.37 billion. However, its current ratio of 1.35 suggests it has enough liquid assets to meet its short-term liabilities. Additionally, the company has generated a positive levered free cash flow of $145.26 million TTM. Although its annual levered free cash flow has remained consistently positive, it has not been increasing over time.

The company has a consistent dividend program but is relatively small. Its most recent dividend has a forward yield of 3.81% at $0.23 per share, with an ex-div date of August 31.

The current stock price is below the average Wall Street target price of $26.83 . The forward price-to-earnings ratio is 19.38, slightly higher than the consumer staple median of 18.45. I believe the sentiment towards the stock is overly negative if we compare Flowers Foods' five-year EPS growth of 9.5% to an average increase in the stock price of 3%, in addition to the management's confidence in its FY guidance. The company has demonstrated its brand strength and improved profit margins by increasing revenue through higher pricing. The stock trades at a two-year low with a favourable price-to-sales ratio of one. Therefore at a two year low, with upward trending top and bottom line fundamentals this could be an opportunistic buy.

Comparing its valuation to Hostess Brands ( TWNK ), Grupo Bimbo S.A.B ( OTCPK:BMBOY ), and TreeHouse Foods ( THS ), we can see that the stock may be undervalued with regards to the price-to-earnings ratio of 20.75 compared to Hostess Brands at 21.95 and TreeHouse Foods.

Risks

Even though Flowers Foods operates in a stable and growing market, the company has experienced a decline in product sales volume. This could potentially harm the business in the future. Additionally, the company faces challenges such as inflationary pressure and increased competition from private-label products. Flowers Foods aims to achieve growth through both organic and inorganic sales. While inorganic growth has brought about diversity and expansion, it has also brought on a significant amount of long-term debt, which could be considered risky if the company's stable growth cannot be maintained. Moreover, the recent acquisition may introduce uncertainties and short-term challenges as it is integrated into the business.

Final thoughts

In its latest quarterly report, Flowers Foods exceeded expectations for both EPS and revenue despite decreased sales volume. Although the stock price is currently at a two-year low, the company's top and bottom lines have steadily increased over the past five years. Furthermore, favourable price increases have shown the strength of the company's brands. Lastly, management has expressed confidence in the FY 2023 results and recently raised the dividend. Given these positive developments, investors may consider taking a bullish position on this stock.

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