Flowers Foods: Digesting Its Earnings Miss, Sell-Off, And Future

| About: Flowers Foods, (FLO)

Summary

Flowers missed earnings estimates last Wednesday evening.

Investors promptly knocked off nearly a fourth of the company's market cap.

The future is still looking bright for the company.

Flowers Foods (NYSE:FLO) reported earnings after the close on Wednesday, February 10th. The company missed analyst estimates and lowered 2016 guidance. Thursday and Friday were filled with a pair of analyst downgrades and a 25% selloff in the stock.

Despite this recent performance, I plan to continue adding shares of Flowers via their dividend reinvestment plan.

Earnings and guidance

The company's fourth quarter performance was sub-par, reporting a sales decrease of 2.2% year over year and an adjusted EPS decrease of 20% year over year.

Full year results were slightly improved, reporting a sales increase of just under 1.0% and an adjusted EPS increase of 2.2% from full year 2014.

The company issued guidance for 2016 of $3.986-$4.080 billion in sales and adjusted EPS of $0.98-$1.04. These numbers compare to previous analyst estimates of $4.070 billion in revenue and $1.10 in adjusted EPS.

Using these new company estimates, sales should increase by 5.5% to 8.0% and adjusted EPS should increase by 6.5% to 13.0% in 2016.

The company's stock fell from Wednesday's close at $20.94 to $15.71 as of Friday's close. Friday's close represents a trailing twelve-month P/E ratio of 17.1 and a forward twelve-month P/E ratio of 15.6 based on the midpoint of company estimates.

Reasons I am continuing to add to my position

1. Flowers stays on top of trends

In the last half of 2016, Flowers acquired both Dave's Killer Bread and Alpine Valley Bread. These are two well-known and popular organic bread producers. Organic food has become increasingly popular in recent years and is projected to continue its rise as millennials seek healthy and environmentally friendly options.

2. Management has history of success

The company has successfully used a growth by acquisition strategy in the past and plans to continue using acquisitions as a key driver of revenue growth. The company's investor fact sheet notes that the company has made over 100 acquisitions since 1968. These acquisitions have been successful by introducing Flowers to new areas geographically and using economies of scale to lower costs such as production and distribution.

3. Current valuation is attractive relative to peers

The company had been trading at fairly lofty P/E values of over 20 ahead of earnings last week, and their five-year average P/E ratio has been over 23. Flowers now trades at lower forward P/E ratios than the three largest packaged goods makers, General Mills (NYSE:GIS), Kellogg (NYSE:K), and ConAgra Foods (NYSE:CAG).

FLO PE Ratio (Forward) Chart

FLO PE Ratio (Forward) data by YCharts

Flowers, as said earlier, is expecting adjusted EPS growth of 6.5% to 13% in 2016, whereas analysts are predicting GIS, K, and CAG to have EPS growth of -0.3%, 4.5%, and 5.0%, respectively. (GIS and CAG's fiscal year ends in May rather than December.) Flowers now appears attractively valued solely on this measure relative to peers.

4. Dividend growth

Flowers gave investors a 17% raise for hanging on to their shares in 2015, raising the dividend to $0.5675 a share. The company has now raised dividends by a compounded average growth rate of 10.5% since 2010 and has increased the dividend for the last 14 consecutive years.

Conclusion

The company hit a speed bump in the fourth quarter of 2015 but I still have confidence in this company moving forward. The earnings miss along with a volatile environment in the market has helped reprice the company's shares to a point where investors should be able to profitably invest for the long haul.

Disclosure: I am/we are long FLO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.