This article is presented as an update to an article I published on Flowers Foods (FLO) on September 22, 2016. Later in this article I will provide a direct link to the original. However, my primary purpose behind this updated article is to reflect on an important investment concept that my experience suggests that many investors tend to either overlook or improperly respond to. In the long run, a company’s stock price will be driven by the operating success that the business behind the stock generates. In contrast, in the shorter run, the company’s stock price can often be greatly affected by emotional responses often instigated by certain events.
The operating success of a business is easily measured by examining important fundamental metrics. These include, but are not limited to, earnings, cash flows, dividend payments, balance sheet items, etc. A careful review, examination and analysis of these important fundamental metrics speak volumes about the quality and success of the business being evaluated. In simple terms, analyzing fundamentals tells you how successful the business has been, how skilled its management team is - and has been, and whether or not it represents an enticing investment opportunity from a shareholder’s perspective.
Events, on the other hand, can often incite highly-emotionally charged reactions. As a result, events can often have a dramatic impact on short-term price action. But most importantly, events can have a significant impact on short-term stock prices even when they really do not have a significant impact on the long-term viability of a given business. The secret to dealing with events, and event risk, is to determine whether it represents a temporary interruption in the business, or a permanent impairment of the business’s future prospects.
When an event represents a temporary interruption, it can often lead to an extraordinary long-term opportunity for investors. More importantly, at least in my personal experience, most events turn out to be temporary in nature. However, panicked investors caught up in the hype and/or hysteria will often sell instead of purchase. Therefore, they frequently take unnecessary losses, and worse yet, turn away from extraordinary long-term opportunities. Some typical events that elicit this kind of behavior might be a product recall, a lawsuit, an industrial mishap such as a factory explosion - to name just a few of the many possibilities.
Flowers Foods, Inc.: Lawsuit an Event Risk
In my original article titled “Flowers Foods A High-Yield Risk Worth Taking” I suggested that the precipitous drop in Flowers Foods’ stock price since October 2015 could be attributed to two primary sources. The first, and in my opinion, most prominent issue was a significant slowdown in earnings and revenue growth that started with fiscal 2014 results. The second contributor to negative investor sentiment was the pending lawsuit which represents an example of an event risk as discussed above.
However, the lawsuit has been settled, which turned negative investor sentiment into positive investor sentiment - at least temporarily. Consequently, Flowers Foods’ stock price has surged approximately 30% since the end of September when I published my original article. But most importantly, is that my current assessment indicates that Flowers Foods has gone from being attractively undervalued in September, to being fairly valued currently. I present my current assessment on Flowers Foods’ current valuation and future opportunity in the following F.A.S.T. Graphs™ fundamental video analysis:
Reasons for Optimism
When considering Flowers Foods as a long-term investment opportunity, the old adage “people got eat” comes to mind. Bread has long been a staple that has been consumed for most every family’s breakfast, lunch and dinner. Although consumers are currently favoring healthier food options, Flowers Foods is adjusting their product offerings accordingly. More importantly, the company is gaining share in the growing organic category as evidenced below.
Additionally, Flowers Foods’ management team is working hard to improve long-term business results. Time will tell how successful these endeavors will be. However, it’s important to remember that the company does not have to grow very much to produce a solid and growing dividend income stream. The following excerpts from their most recent financial report summarize some of management’s current initiatives.
"Allen Shiver, Flowers Foods president and CEO, said. "We remain acutely focused on driving growth and increasing efficiencies, including our Project Centennial efforts. The initial diagnostic phase is complete, and we are now finalizing our plans to implement strategies intended to grow sales and improve margins. Today, Flowers is a strong company with a team dedicated to excellence. Looking ahead, we are confident we are taking the right steps to build on our strong foundation and enhance shareholder value over the long term."
“Project Centennial Update
During the quarter, Flowers progressed towards the completion of the first phase of Project Centennial, which included a comprehensive diagnostic evaluation of opportunities to drive growth, reduce costs, and make investments intended to strengthen the company's competitive position and improve margins over the long term.
In mid-October, Flowers began the second phase which entails formulating and executing new strategies to capture growth opportunities. To fund these initiatives, the company is currently finalizing the specific actions necessary to achieve savings through identified operational improvements that include further use of the company's shared services capabilities, network optimization, and better leveraging the company's expenditures on goods and services. The company anticipates finalizing the implementation plans in early 2017, and expects to provide additional details on Project Centennial when Flowers fiscal 2016 results are released in early February."
Summary and Conclusions
Flowers Foods is a solid dividend growth stock that has produced excellent long-term operating growth. As a result, the market has historically been willing to value the company at a relatively high P/E multiple. However, earnings growth has been slow of late, which has instigated caution on the part of many investors.
Nevertheless, this is not the first time that growth has slowed, and the company has a management team that is known for its adaptability. But perhaps most relevant to the dividend growth investor, is the fact that Flowers Foods has continued to provide strong dividend growth over the past few years in spite of a slowdown of earnings growth.
As previously discussed, management has a plan in place for increasing efficiencies and driving growth. Additionally, the company is aware of changing consumer behavior relating to healthier bread options such as organic multi grain offerings. Last year’s addition of Dave’s Killer breads provides evidence of management’s recognition of the need to provide healthier bread options.
The bottom line is that current valuation appears sound, and the current dividend is well covered and provides an above-average current yield. Consequently, I see Flowers Foods as solid and attractive based on its above-average dividend yield. Moreover, if management is successful in reinvigorating growth, then the company might also represent an attractive total return investment as well. As always, I suggest you conduct your own comprehensive research and due diligence. However, I do believe that Flowers Foods is currently worthy of making that effort.
Disclosure: Long FLO
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
