5 Reasons Flowers Foods Is a Value Play and Not a Value Trap

The drought in the Midwest farm belt of the United States not only reduced the corn crop, but also the share price levels for many stocks in the food industry. As a result, Foolish investors are now presented with an opportunity to reap a rich harvest of undervalued stocks. Flowers Foods (NYSE: FLO  ) is one such company.

Based in Georgia, Flowers Foods has been producing and marketing baked goods and other food items since 1919. Due to the drought last summer, the cost of ingredients such as corn and wheat skyrocketed. That greatly reduced the margins for Flowers Foods, resulting in the share price falling more than 10% for the last quarter. It also greatly increased the appeal of Flowers Foods as a long-term investment for five very compelling reasons.

Superior growth
Even with the higher costs, Flowers Foods is still expanding. Its products, easily recognizable in brands such as Tastykake and BlueBird, reach almost 70% of the households in the United States. As the bakery business is highly fragmented, Flowers Foods has been able to grow profitably through a series of key acquisitions, gradually increasing its economic moat. The low debt and high profit indicators show that these purchases have been adroitly executed.

Its five-year sales growth rate, five-year earnings-per-share rate, and price-to-sales ratio are far more attractive than those of direct competitors such as Hillshire Brands (NYSE: HSH  ) and B&G Foods (NYSE: BGS  ) , as well as the average for the industry. Sector leader growth rates such as these are key indicators that a stock is a value play (which allows investors to buy low and sell high), not a value trap (which entices investors to buy low and have to sell even lower). In a value trap, financials look better due to a collapsing share price rather than an inefficacy in the market that results in long-term gains.

Metric

Flowers Foods

Hillshire Brands

B&G Foods

Industry Average

5-year Sales Growth Rate

6.90%

(17.965)

4.55%

(1.67%)

5-year Earnings-per-Share Growth Rate

6.77%

(28.80%)

17.72%

(17.19%)

Price-to-Sales Ratio

0.91

0.76

2.58

1.72

Source: Motley Fool CAPS.

Superior value
Flowers Foods is also priced better on a value-investing basis, enhancing the appealing growth. The price-to-earnings ratio, price-to-cash flow ratio, price-to-book ratio, and price-to-sales ratio are all better than the industry average. With its low valuations and falling growth rates, Hillshire Brands is a classic value trap. Conversely, Flowers Foods offers valuations that are not only better than the industry average, but buttressed by burgeoning sales and earnings-per-share growth rates.

Metric

Flowers Foods

Hillshire Brands

B&G Foods

Industry Average

Price-to-Earnings Ratio

21.30

3.60

22.80

37.80

Price-to-Cash Flow Ratio

12.0

2.70

(5.30)

15.70

Price-to-Book Ratio

3.23

13.50

2.53

4.75

Price-to-Sales Ratio

0.90

2.53

6.40

1.70

Source: Motley Fool Caps.

Superior income
Enhancing the total return of Flowers Foods is its high dividend yield. Every component of the dividend structure for the company is more enticing than that of others in the industry. For long-term investors, the more robust growth rate of Flowers Foods is very attractive.

Metric

Flowers Foods

Hillshire Brands

B&G Foods

Industry Average

Dividend Yield

3.40%

1.90%

3.90%

2.40%

5-Year Average Dividend Yield

2.70%

4.30%

7.40%

2.50%

5-year Dividend Growth Rate

17.83%

10.62%

5.40%

0.095%

Source: Motley Fool CAPS.

Superior capital structure
Flowers Foods also possesses more sound capital structure than its peers. Debt, both total and short-term, is much lower than the industry average. The company's dividend payout ratio is more modest, too, ensuring that income paid to shareholders does not hinder future growth opportunities. 

Metric

Flowers Foods

Hillshire Brands

B&G Foods

Industry Average

Debt-to-Equity Ratio

0.57

4.02

2.96

0.83

Long Term Debt-to-Equity Ratio

0.49

4.00

2.90

0.68

Dividend Payout Ratio

69%

66%

81%

129%

Source: Motley Fool CAPS.

Superior management makes for a superior investment
In a low-margin industry such as food products, Foolish investors definitely want to go with "the best in show." Flowers Foods' management reveals its skill level through many measures. The capital spending growth rate shows management is committed to future growth for the company rather than creating better short-term earnings. Research by Dr. Robert Haugen and Narden L. Baker (link opens PDF file) has found that low beta companies such as Flowers Foods provide higher returns over the long term, as shareholders hang on to the stock due to confidence that management will continue to deliver better results than its competitors.

Metric

Flowers Foods

Hillshire Brands

B&G Foods

Industry Average

5-Year Average Return-on-Assets

9.20%

7.20%

2.80%

9.10%

Revenue per Employee

$309,000

$431,000

$826,000

$259,000

5-Year Capital Spending Growth Rate

19.35%

n/a

14.07%

8.25%

EBITD Margin (TTM)

9.90

11.70

25.90

(8.00)

5-Year EBITD Margin Average

9.58

11.78

25.34

0.00

Beta

0.13

0.64

1.13

0.61

Source: Motley Fool CAPS. TTM = trailing 12 months.

5 good reasons to buy 1 great stock
Since food services cannot be outsourced, Flowers Foods is an industry leader that is here to stay. The rising sales rate demonstrates that the company has evolved along with consumer tastes. Foolish investors should gobble up Flowers Foods stock while its undervalued shares are still on the table.

While Flower Foods is strong in the United States, profiting from our increasingly global economy can be as easy as investing in your own backyard. Our free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Flowers Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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