Flowers Foods, Inc. (FLO): Will This Food Business March Higher After a Solid Run?

Shareholders of Flowers Foods, Inc. (NYSE:FLO) must be quite happy as its share price has been on the rise, climbing from $19.20 per share in November 2012 to nearly $35 per share, a whopping 82.3% gain. Zacks has also ranked the company as a #1 (Strong Buy). As of March 2013, Steven Cohen also owned nearly 370,000 shares of Flowers Foods in his portfolio. Should investors buy Flowers Foods at its current trading price? Let’s find out.

Business snapshot

Flowers Foods, Inc. (NYSE:FLO) is the owner of several famous fresh breads, buns, and rolls brands including Nature’s Own, Whitewheat, Mary Jane, and Flowers Foods. The company operates in two main business segments: a Direct-store-delivery segment (DSD segment) and a Warehouse delivery segment (Warehouse segment). Most of its revenue, $2.54 billion, or 84.6% of the total 2012 revenue, was generated from the DSD segment, while the Warehouse segment contributed nearly $649 million in sales. The DSD segment enjoyed a higher margin of 9.18% while the operating margin of the Warehouse segment was a lot lower, at 5.58%.

Flowers Foods’ leverage and acquisition

Flowers Foods, Inc. (NYSE:FLO) employs some reasonable leverage in its operations. As of April 2013, it had $946.2 million in equity, $14.25 million in cash, and $638.6 million in debt, including $399 million in senior notes, due 2022. In the beginning of 2013, the company announced the acquisition of some Hostess Brands’ bread assets including Nature’s Pride, Merita, Wonder, and Home Pride brands, 20 bakeries, and around 38 depots. The total consideration amount was around $360 million.

The acquisition is under regulatory review and is expected to close in the second half of fiscal 2013. Flowers Foods, Inc. (NYSE:FLO) is trading around $35 per share with a total market cap of $4.9 billion. The market values the company quite expensively at 14.2 times EV/EBITDA. In the coming years, Flowers Foods could realize the synergy and the gain from its acquisitions, including Hostess Brands and the recent purchase of Sara Lee and Earthgrains brands.

Its bigger peers are valued much cheaper, and offer better yields

Compared to its much bigger peers, Campbell Soup Company (NYSE:CPB) and General Mills, Inc. (NYSE:GIS), Flowers Foods, Inc. (NYSE:FLO) seems to be the most expensively valued. Campbell Soup is trading at $45.80 per share with a total market cap of $14.4 billion. The market values Campbell Soup at around 11.37 times EV/EBITDA. Campbell Soup has been trying to expand its footprint in the organic baby food market, which has recently experienced tremendous growth of 43%. Recently, the company announced that it would purchase Plum Organics, the organic baby food maker.

According Campbell Soup Company (NYSE:CPB), Plum ranked the fourth in the baby food market. The company intended to keep Plum as a separate brand with the same packaging. Moreover, Plum could take advantage of the distribution network and experience of Campbell Soup. According to CEO Denis Morrison, Campbell saw the fit between its Pepperidge Farm Goldfish crackers with Plum’s products.

General Mills, Inc. (NYSE:GIS), the owner of Cheerios, Trix, Whips!, Pillsbury, and Progresso, has become one of the biggest food companies in the world. At $48.90 per share, General Mills is worth more than $31.5 billion. It is also has a lower EV multiple than Flowers Foods, Inc. (NYSE:FLO), at 11.36. Most of its revenue, around 22% of the total, is derived from sales to Wal-Mart Stores, Inc. (NYSE:WMT) and its affiliates.