Baking snack foods is no cake walk for Flowers Foods (FLO) given high commodity prices and upcoming difficult earnings comparisons.
Yet Janney Montgomery Scott analyst Mitchell Pinheiro sees the stock reaching $27, more than 30% upside from current levels,  and today reiterated his Buy rating on the stock.Â
After an analyst day with Flowers, Pinheiro writes that the company’s recent acquisition, Philadelphia-based Tasty Baking Co., is outperforming, which, combined with a stable pricing environment and greater scale in high-growth markets, should outweigh higher input costs for the firm.
Read more below:
Tasty Baking performing ahead of FLOÂs expectations: FlowerÂs analyst day in Philadelphia showcased the companyÂs latest acquisition  Tasty Baking Co. Having toured the Tasty Baking facility several times prior to the merger, we saw significant improvement in Navy Yard bakery productivity. FLO noted that TastyÂs production/start-up issues plaguing the plant were largely fixed by the time FLO owned the asset. FLO management could not hide their enthusiasm for Tasty Baking. Capacity utilization in the Navy Yard bakery is up 20% since the acquisition driven by the incremental Tasty sales on FLOÂs core routes. Capacity utilization is the key to the Tasty acquisition as the Navy Yard bakery was built for high volume and was operating at less than 50% capacity at the time of the acquisition. Tastykake is now available on over 3,000 routes and should see steady growth as FLO goes through the process of garnering product approval with its key grocery customers. We believe this is excellent timing for FLO as the leading snack cake producer (Hostess) is in bankruptcy and is at risk of losing shelf space just as Tastykake is set to ramp distribution.
Acquisition growth / Green Field Bakery:Â It sounds like FLO is a week or three away from an announcement of a new bread bakery with access to the eastern Pennsylvania market. While we were expecting an acquisition to facilitate the needed capacity expansion, we get the strong sense that FLO is looking at a green field bakery. The Tasty acquisition included two facilities (Navy Yard and Oxford, PA). The Oxford plant is TastyÂs fried-product facility but was built (by Keebler) with the ability to double its footprint. Direct access to rail and a good labor market also make this facility a prime location for expansion. Separately, we continue to believe FLO is the likely buyer of the divestiture assets from Grupo Bimbo. The Harrisburg assets (primarily sales) are less attractive than we first thought.
Change in commodity strategy:Â FLO had adhered to a strategy of covering its ingredient needs 6-9 months forward, believing that it provided enough time to make the necessary pricing adjustments. Management reviewed its commodity purchasing strategy and concluded that in volatile ingredient markets, it is best to shorten coverage (4-7 months) and remove the risk of being caught too long in a declining market. Management believes that it would still have time to adjust prices with shorter coverage, particularly in the branded DSD business. The Warehouse segment (branded snack cake, foodservice, non-branded cake, vending) remains the toughest market for pricing and will likely remain a margin drag in rapidly rising input cost environments, regardless of the length of input cost coverage.
