Flowers Foods: Best of Breed in Bread Baking

The bread and baking companies within the supermarket industry continue to face a tremendously challenging environment. Wheat prices continue to be at or near record highs driving commodity costs and hurting bakers margins. The huge run up in flour prices has hurt all baking manufacturers causing across the board price increases and causing industry executives to look for any and all means to cut operating costs.

In addition, baking continues to be a very fragmented market with a handful a major players competing vs. many regional companies. The largest and most well known Interstate Bakeries (maker of Wonder and Home Pride bread and Hostess Cupcakes) continues to fight for its life in bankruptcy courts.

So what does this mean for the average investor? Are there any strong companies worth a look for a safe, profitable investment? Lets review the major players and see if any companies pass the test.

Interstate Bakeries

You know the industry is tough when one of its largest players is in bankruptcy court and has a cost structure that could choke a horse. IBC has so many problems even the other bakers didn't want to touch it at fire sale prices. Lets start with high fixed cost manufacturing plants, throw in high cost union route system and add products that are not perceived as healthy and against all consumer trends. A group led by Ripplewood holdings is currently negotiating with IBC management to potentially buy the company and pull it out of bankruptcy.

Sara Lee (SLE)

Best known for its delicious cheesecakes but they also sell bread under the Sara Lee and Earth Grains trademarks. Not a pure baker though as they are a diversified conglomerate with brands like Ball Park franks, Hillshire Farms and large foodservice, coffee/beverage and household and body care divisions. In fact US Retail Bakery sales contribute only about 15% of their sales and less than 3% of their profits. If you like Sara Lee its not for their US bakery division.

Weston Foods

Most investors haven't got to a clue when the name Weston Foods is mentioned. That's because they are a Canadian company and trade on the Toronto exchange. They do have a nice stable of brands (Entenmanns, Thomas English Muffins, Arnold and Brownberry breads) They have dominant shares on the East Coast and are solidly profitable. Unfortunately, their parent company owns Loblaw's the largest Canadian grocery retailer. Loblaw's appears to be stuck in a never ending cost restructuring frenzy driving the stock price down from mid 90's a few years ago to its current level in the high 40's.

Grupo Bimbo

Another name that most investors have never heard of. The company name unfortunately is pronounce how it is spelled and has been part of many politically incorrect jokes over the years They are the largest Mexican baker and own the Oroweat brand. Oroweat bread leads the West Coast market and they have successfully helped shut down IBC's operations in California. Here again a solid company but not much is known and provided by the parent company in terms of financials.

Pepperidge Farm

Probably one the best known brands and also a very well run company. They compete more in the premium end of the bread market and rely more on their delicious cookie and Goldfish cracker sales to drive sales and profits. Here again they are owned by a large conglomerate Campbell Soup (CPB). While Pepperidge Farms results have been impressive, the rest of Campbell's results have been uninspiring.

Flowers Foods (FLO)

Lastly, we come to the only company that is performing well and is not overshadowed by an underperforming parent company. Flowers has strong market share positions in the Southeast and Mid Atlantic states. They have good brands led by Nature's Own and a low cost route and manufacturing system that allows them to make money and compete aggressively.

Most of their sales are also tied to bread vs. specialty goods (donuts/cakes etc.). That is definitely a good thing as the sweet bake goods market faces rising commodities and lower consumption,two things you never want together (just ask Hostess). Flowers is a well run company that continues to take pricing, aggressively hedges commodity costs and continues to drive productivity savings.

Their PE is starting get up their at over 20 but they have been able to drive consistent double digit profit growth and remain well positioned for the future. Flowers appears to be the one bread company worth taking a 2nd look for future investing.

Disclosure: None

Comments

[grdane]

isn't there a company that prepares the dough for the large chains to bake/heat up in their stores? i thought I read somewhere that one company does this for wakefern, whole foods, wegmans and perhaps others