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Flowers Foods: Lots of dough, not much yeast


Dear Mr. Berko:

I own 10 shares of Kellogg Co., which I bought in November 2000 at $25 per share on your recommendation. Five months later, it spun off Flowers Foods and I got 20 shares of Flowers. Now after two splits I have 45 shares and want to know if I should buy 55 shares for a round lot of 100 shares. So tell me what you think of this company. Should I buy 55 shares or sell 45 shares or hold the 45 shares I own? My sister-in-law works for the company in Thomasville, Ga., and she thinks I should buy 155 shares so I will own 200.

D.H., Cleveland

Dear D.H.:

Way back in the old days, I owned Flowers Foods Inc. (FLO-$24.67) and it just couldn’t get out of the starting gate. I think I owned it at $16 a share and for several years hoped and hoped it would move higher. Well, it didn’t! I finally realized that “hope” was one person’s pleading to a multibillion-year-old universe, asking it to suspend its natural order for the convenience of an insignificant life form.

So I sold Flowers and took a small tax loss, and a few years later the folks from Kellogg decided to buy it. Then in March 2001, Kellogg spun off Flowers (now called Flowers Foods) on one share for each five shares of Kellogg, and the new Flowers began trading at $20. Well, there’s a fine line between hope and despair — in 2002 FLO split 3-for-2, and in 2003 FLO split 3-for-2 once again. Oh, well!

Selling bakery products is a tough business. FLO has to compete against the specialty grocery stores with their own in-house bakeries, large national bakeries, smaller regional bakeries and supermarket chains with in-store bakery departments.

In this difficult market, FLO seems to be the best. The company has 22 percent of the fresh bread and rolls market vs. 13 percent for Sara Lee and 9 percent for Interstate Bakeries, which recently filed for Chapter 11 bankruptcy protection. FLO has 34 hugely efficient baked goods factories, a cadre of highly motivated independent distributors and a long list of well-known and savorous calorie-laden products.

FLO’s direct-store delivery in 29 of the top 50 U.S. markets enables nearly 35 percent of the American population to consume a Flowers product. The company has uncommonly superb management, which owns an impressive 19 percent of the stock. And who wouldn’t want to own a company that makes baked goods with names like Nature’s Own, Cobblestone Mill, Sunbeam, BlueBird, Dandee, Bunny, Mary Jane, ButterKrust, Holsum, Evangeline Maid, Mrs. Freshley’s, Bishop’s, Tesoritos and other names that will titillate and salivate your taste buds?

Flowers’ financials might even titillate your portfolio. This company has $1.6 billion in revenues, a rich cash flow of $2.95 a share, operating margins of nearly 10 percent, a healthy net profit margin of 4.1 percent, 44 million shares out and just $20 million in long-term debt. And if those facts don’t melt your cheese, be aware that FLO’s new “direct-store-delivery” routes can now ship 25 percent more product to a larger area and that its new Denton, Texas, bakery should help boost FLO’s revenues by nearly $125 million in the coming 12 months. Management thinks so highly of its company that the board approved a 5 percent stock buy-back this year.

And yet, even though I think FLO’s pastries, breads, Danish rolls, breads and pies are the bee’s knees, I don’t think the company’s revenue growth has enough oomph to encourage the shares to a higher price. I think FLO’s labor, energy and ingredient costs will rise next year, and these increases could restrict profits.

I’m also concerned about the popularity of the low-carbohydrate diets and the success of a national campaign to encourage consumers to consume less-fatty foods. I’m concerned that increasingly the intense competition in this industry (I never thought Interstate would be in trouble) and the consolidation among retail chains can lead to lower prices and eventually lower margins. And I’m concerned that the financial problems of Winn-Dixie Stores Inc. — FLO’s second-largest customer and the source of 5 percent of its revenues — will cause some revenue losses.

Flowers Foods is a heck of a company and it had a dandy run when the market was crashing around us in 2001 and 2002. But unless management makes a “big-bang” acquisition, I believe the stock will molt in the $29-$33 range for the next few years. So I think there’s better opportunity elsewhere.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

© Copley News Service

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