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
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.
In the beginning of 2012, General Mills, Inc. (NYSE:GIS) launched Nature Valley Protein Bars. Right in the first year, it has brought to the company $95.7 million in sales. Information Resources ranked the product as one of the top 10 New Product Pacesetters for 2012. Information Resources commented: “Nature Valley Protein Bars, for instance, offer the delicious taste of nature in a handheld bar packed with 10 grams of protein.”
What I like about General Mills, Inc. (NYSE:GIS) is its uninterrupted dividends for nearly two thirds of the century. Since 2003, it has raised its dividends from $0.55 per share to $1.22 per share. Income investors might also like the fact that General Mills offers decent dividend yield at 3%. Campbell Soup Company (NYSE:CPB) ranked second with a 2.40% dividend yield while the dividend yield of Flowers Foods, Inc. (NYSE:FLO) is the lowest at 1.90%.
My Foolish take
After the significant rise in the stock price, Flowers Foods, Inc. (NYSE:FLO) is not cheap anymore. It has a much higher valuation than the two biggest and strongest companies mentioned above. Even with the EPS and cash flow accretion from Sara Lee, Earthgrains, and Hostess’ brands, the highest valuation and lowest dividend yield restrains me from initiating a long position in Flowers Foods at its current trading price.
The article Will This Food Business March Higher After a Solid Run? originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Flowers Foods.
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