Keto Breads And Wonder Brand Expansion Will Drive Future Success

Key Takeaways

• Expanding product lines and improving distribution efficiency are expected to boost revenue and margins by aligning with consumer trends and reducing costs.
  
• Strategic M&A and cost-saving initiatives aim to enhance profitability and growth by optimizing operations and exploring new revenue avenues.
  
• Shifts in consumer spending and weak category trends are pressuring revenue growth, while litigation and higher costs pose additional financial risks.

Catalysts

Produces and markets packaged bakery food products in the United States.

• Flowers Foods is expanding its product range by launching innovative items such as keto breads and extending brands like Wonder into sweet baked goods, which is expected to increase future revenue through product diversification and capturing consumer trends.
  
• The transition from a partnership with independent distributors to an internal sales team in California aims to streamline operations and potentially improve net margins by reducing distribution costs and improving service efficiency.
  
• The ongoing ERP (Enterprise Resource Planning) system upgrade is expected to enhance operational efficiencies, reduce costs, and improve data management, positively impacting future earnings by optimizing the supply chain and improving margins.
  
• Savings initiatives aimed at offsetting inflationary pressures and achieving a target of $40 million to $50 million for 2024 are likely to improve net margins and profitability as Flowers Foods reduces costs across labor, shipping, and commodities.
  
• The company's pursuit of strategic M&A to strengthen its core business and explore new revenue streams is anticipated to drive future growth, potentially boosting both revenue and earnings if successful acquisitions are integrated effectively.

Flowers Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Flowers Foods's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $286.8 million (and earnings per share of $1.37) by about January 2028, up from $240.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $244 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, up from 17.6x today. This future PE is greater than the current PE for the US Food industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Flowers Foods Future Earnings Per Share Growth

Risks

• Shifting consumer spending patterns have led to headwinds in fresh packaged breads, with category sales declines in both units and dollars. This could impact future revenue growth as sales in this core category struggle.
  
• Weak category trends are affecting the cake business, with unit sales in tracked channels declining 5%, putting pressure on revenues from this segment.
  
• Volumes across the business have decreased, and while pricing has offset some of this decline, lower volumes can negatively affect revenue and net margins if the trend continues.
  
• Higher workforce-related costs and increased outside purchases of products have partially offset improvements in gross margins, which could pressure net margins if not managed effectively.
  
• Ongoing class action litigation in California with distributor settlements poses a financial risk and could potentially impact earnings and cash flow if costs or settlements are higher than anticipated.

Valuation

• The analysts have a consensus price target of $24.0 for Flowers Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $286.8 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $20.1, the analyst's price target of $24.0 is 16.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.