Flowers Foods' Growth Story Intact Despite Legal Woes

Although Flowers Foods, Inc. FLO may report lackluster results for Q4 2016, its performance will likely improve in the first quarter of 2017 against easier comps, Wunderlich’s Mitchell B. Pinheiro said in a report. He added that the company could exceed the current investor expectations for 2017, “which to us is a solid set-up for stock performance.”

Pinheiro initiated coverage of Flowers Foods with a Buy rating and a price target of $24.

Legal Woes

On December 9, 2016, the company agreed to a settlement with its largest class action lawsuit for $9 million. Although the Department of Labor review is ongoing, “the incoming pro-business Trump administration could mitigate this regulatory risk,” Pinheiro mentioned.

Legal expenses related to these issues are estimated at ~$15 million range in 2016, with the levels being similar in 2017. Higher legal cost is likely to have adversely impacted the company’s 2016 margins by 30–40 basis points and could continue to be a drag in 2017.

Long-Term Growth Story Intact

Flowers Foods could continue to gain market share, given its “competitive strengths and expanded addressable market,” which would likely enable the company to achieve “an attractive revenue and earnings growth profile and higher asset returns over time,” the analyst commented.

Terming Flowers Foods as a “proven, consistent, long-term consumer staples growth story,” Pinheiro noted that the company had a ten-year revenue and net income compounded annual growth rate of 8 percent and 10 percent, respectively.

Moreover, free cash flow as a percentage of revenue had averaged 5.0 percent over the past ten years and 6.4 percent over the past three years, “despite continued aggressive capital investment.” This had allowed Flowers Foods to pursue “a steady acquisition cadence while maintaining conservative balance sheet leverage,” the analyst stated.