Flowers Foods - FLO - A Zacks Top 10 for '08

This is the Zacks teaser describing FLO:

Stock #2: Food company feeds on higher prices. This market leader has pushed through price increases, and looks ahead to annual double-digit growth for fiscal 2008.

Here's the Reuters description of Flowers Foods' business:

Flowers Foods, Inc. (Flowers Foods), incorporated in October 2000, produces and markets bakery products in the United States. The Company consists of two business segments: Flowers Foods Bakeries Group, LLC (Flowers Bakeries) and Flowers Foods Specialty Group, LLC (Flowers Foods). Flowers Bakeries produces and markets its bakery products in the southeastern and southwestern United States. Flowers Bakeries markets a range of breads and rolls under its Flowers, Nature's Own, Whitewheat, Cobblestone Mill, Captain John Derst, Dandee, BlueBird, Butter Krust, Mary Jane, Evangeline Maid, Ideal and Mi Casa brands. Flowers Specialty produces snack cakes for sale to co-pack, retail and vending customers, as well as frozen bread, rolls and buns for sale to retail and foodservice customers. Flowers Specialty products are distributed nationally through mass merchandisers, brokers, and warehouse and vending distribution. On February 18, 2006, the Company acquired Derst Baking Company (Derst).

Morningstar is favorable on Flowers Foods' prospects, although the stock is priced near its 52-week high, and Morningstar's fair value. It's a well-run company in a tough sector.

There hasn't been much to like about the packaged food business in the past several years, as the categories face increased private-label penetration, declining brand relevance, and changing consumer preferences. Manufacturers such as Kraft and Sara Lee struggle to carve out successful strategies to cope with eroding demand for their products. With this in mind, it's all the more surprising to find Flowers Foods, a small bread company, beating the odds.

As a regional manufacturer of bread, rolls, pastries, and snack cakes, Flowers implements a focused, two-prong strategy. The firm develops branded bread products that meet consumer needs, and it leverages its network of independent distributors to effectively service 3,000 direct store delivery routes. Flowers has strong brands in the bread aisle, including Nature's Own and Cobblestone Mill, and it strives to keep its products front and center in a rather staid category.

The bread aisle is crowded, however, and it's not just strong brands that have helped Flowers achieve a 23% market share in the Southeast. The company has an enviable DSD network of independent distributors that distribute 80% of its products to grocery stores, convenience stores, and food-service customers such as restaurants. The remaining 20% of Flowers' distribution is direct-to-customer warehouses. With efficient bakeries, and distributors who benefit when customer accounts are maximized for sales and profitability, Flowers carefully builds out its DSD territory. Each year, new markets add about 1.5% to sales, and the firm is very proactive about making investments in technology and capacity.

Sounds to me like FLO is a nice house



surrounded by this



and this



in a crap neighborhood.

Morningstar seems to agree:

Flowers continues to focus on what it does best: building market share carefully, introducing new products, and finding bolt-on acquisitions it can easily integrate. We think it remains a solid choice in an otherwise unattractive industry.

Generally, I would rather invest in a strong business in a strong sector. So how does FLO sweeten their offerings and make them more enticing? How about reporting solid earnings and a share buyback:

Market Report -- In Play (FLO)
January 31, 2008 7:38 AM ET
Flowers Foods beats by $0.02, beats on revs; guides FY08 EPS in-line, revs in-line Reports Q4 (Dec) earnings of $0.23 per share, $0.02 better than the First Call consensus of $0.21; revenues rose 8.1% year/year to $473.7 mln vs the $468.8 mln consensus. Co issues in-line guidance for FY08, sees EPS of $1.07-1.17 vs. $1.12 consensus; sees FY08 revs of $2.21-2.258 vs. $2.2 bln consensus.
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BOSTON (Thomson Financial) - Flowers Foods Inc. Friday declared a quarterly dividend of 12.5 cents a share, and said it is now authorized to repurchase up to 30 million common shares.

The dividend is payable on March 7, to shareholders of record on Feb. 22.

Flowers Foods (nyse: FLO - news - people ) said the board increased the company's share repurchase plan by 7.1 million shares to 30 million from 22.9 million.

Flowers Foods has about 91.9 million shares of common stock outstanding.

Shares of the Thomasville, Ga.-based provider of packaged bakery foods rose 1.2% to $24.40.

FLO's PEG ratio of 1.9 is empirically high, as well as high in regard to its competition. Like EMN, I do not find FLO shares to be trading at a compelling price. At today's close of $24.22, I would develop an appetite for FLO at an 8-10% discount, closer to the 200-day-moving-average--not exactly the discount on day-old baked goods, but a discount nonetheless.