Bakery foods company Flowers Foods (NYSE:FLO) has turned in a sub-par performance on the stock market this year. The company's shares are down close to 5% so far in 2014 after a promising start, touching their 52-week low in early February. However, investors should consider this drop an opportunity since Flowers Foods is showing signs of revival, and it is in a better position than peer Campbell Soup (NYSE:CPB) in the bakery industry. Also, the company is trying to catch up with Grupo Bimbo (NASDAQOTH:GRBMF), which is the largest bakery in the U.S.
Acquisitions are driving growth
Flowers Foods reported some good numbers in the fourth quarter, driven by its various acquisitions. The company managed to increase its customer base by around 19% and it looks set to keep growing going forward.
Flowers Foods is seeing strong growth in revenue. For the fourth quarter, its top line increased 12.6% to $843.6 million from the year-ago period. Its adjusted income was down 4.4% due to acquisition-related costs. However, these acquisitions should drive Flowers' performance over the long run.
The company acquired Lepage Bakeries in 2012 and some of Sara Lee's bread brands in California last year. The company also acquired the bread brands of Hostess in 2013.
These acquisitions strengthened Flowers Foods' brand portfolio, especially that of Hostess. Hostess' bread brands had strategically located bakeries which Flowers Foods can reopen depending on demand. The company has relaunched the Wonder, Merita, Home Pride, and Butternut brands in its direct store delivery, or DSD, business. These new brands have expanded the company's presence in the Midwest and the Northeast.
Flowers Foods' acquired brands are performing well. For example, the Butternut white loaf was the No. 2 loaf in the Cincinnati market in its very first week of introduction. More importantly, it has retained that spot in every week since then.
Also, the acquisition of Sara Lee's bread brands enabled Flowers to increase its presence in California. In addition, Tastykake has also proven to be a strong player across several markets. Since its acquisition in 2011, its sales have doubled.
A look at organic growth moves
The company has also made significant progress in its tortilla bakery by improving its operations and efficiency levels. Apart from this, its overall bakery performance has improved as manufacturing efficiency increased by up to 200 basis points in the fourth quarter. Management expects this trend to continue and hopes to increase the efficiency level further.
In the Southern market, Flowers' legacy brands had also gained considerable market share before the reintroduction of the bread brands acquired from Hostess. It has maintained a strong share in the Southern market. IRI research data shows that Flowers has gained 6.3% market share in the U.S. in white breads, and 3.18% of that came from the relaunched brands. This is a significant achievement for the company and management is confident that the acquired brands will fuel long-term growth.
Flowers also plans to expand its production capacity. Consequently, it is adding a new bread production facility at its Modesto California bakery, and it expects operations there to start in the spring. This is in addition to the bakery that it already has in Henderson, Nevada. Together, these facilities should enable Flowers to address demand in the California market.
Gauging the competition
These moves should help Flowers consolidate its position in the U.S. bakery market against the likes of Campbell Soup. Around 28% of Campbell's revenue derives from bakery and snacks, but the company has a market share of just under 6% in the U.S. versus Flowers' 14%. However, Campbell is trying to get better in this department. It opened a $30 million innovation center at Pepperidge Farm in 2012 to enhance the performance of its bakery and snacks segment. This means that Flowers needs to keep a close eye on Campbell's moves in this segment.
However, Flowers still has some way to go before it catches up with Grupo Bimbo. Bimbo is three times the size of Flowers in terms of market capitalization and it has a presence across the Americas and certain parts of Europe. Bimbo is aggressively expanding its footprint in North America. The company spent $75 million on land last year to construct a plant in Pennsylvania and strengthen its presence in the Northeast market.
Bimbo completed the construction of this factory last year, but it is not done yet. The company had outlined a $1 billion investment over a period of five years in 2011. With two years of that timeline still remaining, we can expect that it will continue to bolster its position going forward. As a result, Flowers will need to strengthen its product introductions and improve its distribution network to ward off the threat from Bimbo.
Flowers has chalked out strategies for the future and the acquisitions should continue to add value to the business. In addition, the expansion of the production facility is yet another positive. Moreover, Flowers is cheap at just 19 times earnings in comparison with Bimbo's trailing P/E of 37. Since Flowers is not as big as Bimbo is just yet, the company has more room to expand its business. Flowers Foods looks like an investment that could blossom over the long run.
Shirish Mudholkar has no position in any stocks mentioned. The Motley Fool recommends 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.