IN MAY FARMERS in the Midwest saw signs of a stellar wheat crop, but the first half of June brought too much rain. That shrunk kernels and invited fungus. Now, as combines begin cutting and threshing and the first of the harvest comes to market, farmers are reporting subpar bushel weights. It's nothing on the scale of last year's late-April frost, which produced the worst harvest since 1993. Still, a disappointing yield might boost wheat's price, which had eased since March but is more than double its year-ago level.
That presents a fresh challenge for bakers, who buy wheat and sell bread. It raises the question of whether a top performer in the industry, Flowers Foods (FLO), whose stock has multiplied more than sixfold in value since its 2001 debut, will continue its ascent.
Based in Thomasville, Ga., Flower distributes to 38% of the U.S. population, mostly in the South. Brands include Sunbeam and Nature's Own bread and buns, Blue Bird and Mrs. Freshley's snack cakes and Mi Casa tortillas. Flowers began operations in 1919 and first went public in 1968. In the 1990s it bought Keebler Foods, a cookie and cracker maker, and Mrs. Smith's, a frozen pie producer. A 2001 sale of Keebler to Kellogg (K) and spinoff of the rest of the business resulted in the stock's current iteration. Flowers sold Mrs. Smith's in 2003.
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In recent years Flowers has expanded its distribution network and improved the efficiency of its more than three dozen bakeries. It has launched products designed to reach new customers, like breads and snacks marketed to Hispanics, and ones meant to boost margins, like 100-calorie snack packages. It has also bought smaller bakeries. Over its past four quarters Flowers has beaten Wall Street's profit forecasts four times, and by increasing amounts.
First-quarter results, reported May 22, showed sales increasing 11% to $676.7 million and earnings per share jumping 26% to 39 cents, four cents more than analysts had forecast. Gross margin, which measures what's left of sales after subtracting for manufacturing costs like ingredients and labor, fell 1.4 percentage points. But selling expense as a percentage of sales fell 1.8 percentage points, leading to an overall improvement in operating margin. That helped win Flowers a spot with seven other names on a recent screen for companies with rising profitability. (Use SmartMoney's stock screener and the full list of criteria to run the search for yourself anytime.)
Management raised its full-year profit guidance but noted on its conference call that the second quarter will face a difficult peak in ingredient costs and that some marketing spending has been shifted from the first half of the year into the second. So while earnings for all of 2008 are seen increasing 19%, those for the next two quarters are expected to rise 13% and 17%. That's healthy growth, but it makes the stock seem fully priced at 23 times this year's earnings.
One plus for holders who wish to stick with the stock: Flowers recently boosted its dividend. The current yield is around 2.1%, and last quarter management spent on share repurchases an amount equal to about half its dividend payment.
Correction:
This story originally said that Flowers Foods sold its Keebler stake to Kraft Foods in 2001. It sold it to Kellogg.
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