Writing on the Wall for Tasty Baking

| About: Flowers Foods, (FLO)

On Friday, Tasty Baking (TSTY) filed an extension for its 10-K in the market after hours shown here. In this filing they included some news and financial numbers that weren't a total shock, but still very bad. The stock plummeted in the after hours to reach a new 52 week low. Below is some extra information about TSTY, and I think shorting it above $1.50 is still worth the risk. If they go bankrupt, the stock will plummet to $0.20 a share or lower.

A couple of days ago, I was at the Duane Reade next to my place in Upper East Side Manhattan. Along with some other items, I bought a Tastykake cream-filled Koffee Kake. While I was buying it at the cashier, I started talking with the manager of the store. I asked him, “do Tastykakes sell much compared to other brands?”

And he said: “Nope, and the Tastykakes we have on the shelf now are the last ones you’re gonna see. Tastykake isn’t crediting me for the cakes that expire and don’t sell. They just come in here and exchange the old boxes for new ones. So we’re not taking them anymore.”

“Really? And the other cakes like Entenmann's’s do credit you for cakes that don’t sell?” I asked him.

“Yep, and they actually sell.”

One has to wonder, how many other stores that sell Tastykakes are going through the same thing?

It isn’t a conclusive sign, but it definitely is a negative for the company. I’ve also noticed some other negative signs.

Autumn Bayles, the Sr. VP of Strategic Operations, has sold 9665 shares since March 1st at close to 52 week low prices. Now this is a very high ranking officer in the company; she’s right under the CEO in the management list, so I assume she’s second in command. If she knew of some buyout in the works, I think she would hold out on selling her shares until the good news came out. Now this doesn't conclusively spell doom for the company, as maybe she really needed the money, but she’s getting paid a healthy salary being a Tasty VP. The other VP gets paid $264K a year, so I’m sure she gets at least that.

I spoke with the Investor Relations department at Tastykake to try to get more information. When I started asking some questions about the company’s future, especially when I asked him if bankruptcy might be on the horizon, I could tell he was getting nervous. He was trying to sound confident, and used professional words and descriptions for Tasty and their plans, like they have some new products coming out soon. However, underneath his accomplished words, he sounded scared and he had trouble taking breaths. Again, this is just speculation, maybe he’s just the type that gets nervous very easily on the phone, but I believe there is probably some validity to his fear.

Who is going to buy Tasty Baking? Let’s go through the possibilities.

Flowers Foods Inc (NYSE:FLO), Diamond Foods (NASDAQ:DMND), and Lance, Inc (NASDAQ:LNCE) – All three of these bakery and snack foods companies are feeling the bite of increased commodities costs. They are also all carrying very high debt loads compared to their size. Buy Tasty and take on all that extra debt and risk? Very unlikely.

ConAgra Foods (NYSE:CAG), Campbell Soup Co (NYSE:CPB), HJ Heinz (HNZ) – These behemoths sell some bakery foods along with a plethora of other kinds of food. However, a company of this size isn’t going to want to waste their time with a small company like Tasty, unless there was something extremely unique and fabulous about their cakes. The CEOs of these companies have a reputation to uphold, and messing around with Tasty Baking would easily become an embarrassment.

Grupo Bimbo (bimboa.mx) – Now here’s a company that could conceivably buy TSTY. It could easily afford it and handle the debtload. Grupo’s Entemann pastry products are a direct competitor to Tasty Kakes, and are often sold on the same shelf. Grupo would have to have a great vision in buying Tasty, because why would it want to have two products that compete with each other? Grupo would prefer that TSTY just disappear.

Another option is TSTY might get a PIK loan to keep it alive until it becomes profitable or gets bought out. I think this is unlikely. The savior organization would have to have very deep pockets and would need to provide TSTY a loan of $20M or more. They would have to love the company and really believe it can make a rebound. I think the odds of a PIK deal are very slim, and if it would happen, they would charge a crazy high interest rate of 15% or more. This is a realistic rate because the company is already borrowing $3.5 million at a 12% rate with principle and interest due on December 31, 2011.

Disclosure: I am short TSTY.