Canada Bread Co., Ltd. $60 (Toronto Symbol CBY Conservative Growth Portfolio, Consumer sector; Shares outstanding: 25.4 million; Market cap: $1.5 billion; SI Rating: Above average) makes a wide variety of baked goods such as bread, bagels and rolls. It also makes specialty pasta and sauces. Major brands include Dempster’s, Olivieri, and Olafson’s. Canada Bread accounts for about 30% of Maple Leaf’s sales. Thanks partly to acquisitions, Canada Bread’s sales rose from $1.2 billion in 2003 to $1.5 billion in 2007. Earnings before one-time items rose from $1.61 a share (total $63 million) in 2003 to $3.31 a share ($129 million) in 2007. Innovative products that take advantage of growing interest in healthy eating are also helping to expand Canada Bread’s earnings. For example, the company has developed a new bread that contains inulin, a fibre that improves digestion. Premium products like this generate higher profit margins for Canada Bread than its regular products. Another big part of the company’s long-term growth strategy is to expand its overseas operations, which now supply 25% of its total sales. It’s now one of the largest producers of bagels and specialty bakery products in the UK. Canada Bread also owns three bakery facilities in the United States. The company is also pursuing acquisitions in Canada. In early 2008, it paid $43.5 million for Quebec-based Aliments Martel, which makes prepackaged sandwiches and sweet goods. Canada Bread may have to pay an extra $22.6 million based on Aliments Martel’s performance over the next three years. Despite the acquisition, sharply higher prices for wheat cut Canada Bread’s earnings in the second quarter of 2008 by 64.3%, to $0.30 a share (total $7.5 million) from $0.84 a share ($21.2 million) a year earlier. Sales grew 16.4%, to $437.4 million from $375.7 million. If you exclude acquisitions, sales rose 8.9%.
Price hikes will offset higher costs
Canada Bread has increased its selling prices to offset its higher raw material costs. However, it will take several weeks before the higher prices help stabilize the company’s profit margins. Contracts to buy flour at fixed prices will also help the company lock in its costs for the rest of 2008. The stock got has high as $75 in June 2008, but moved down recently due to the lower second quarter earnings. Maple Leaf’s high degree of ownership also hurts its liquidity. It now trades at 21.5 times its likely 2008 earnings of $2.79 a share. The $0.24 dividend yields 0.4%. Canada Bread is a hold.
