Stock of the week: Canada BreadStock of the week: Canada Bread
The jump in the prices of raw materials — especially wheat — and the higher loonie is holding back Canada Bread's earnings growth. But it keeps building its business. That's why the stock remains a buy for long-term gains — on top of the 195 per cent it has returned these past five years.
In the six months to June 30, Canada Bread earned $40.6 million, or $1.60 a share, excluding one-time items. This is down by 3.6 per cent from $42.3 million, or $1.66 a share, a year earlier and on the same basis.
Just remember that an 8.3 percentage point jump in Canada Bread's income tax rate hurt its results. Earnings from operations of $64 million were up by 6.3 per cent. Similarly, its pre-tax income of $61.7 million rose by 5.5 per cent. These better pre-tax results were confirmed by a 5.3 per cent rise in the company's cash flow.
Canada Bread is building its business through acquisitions and by investing in its operations. On Aug. 17, it paid C$40 million to buy La Fornaia in the U.K. This bakery generates yearly sales of 23 million pounds sterling (about C$49 million). It sells its premium-quality hand-crafted breads to big retailers and foodservice companies across the U.K. and Europe. This adds to Canada Bread's British product lines of bagels, croissants, in-store bakery and hand-held snacks. La Fornaia's modern bakery in London raises Canada Bread's network of British facilities to seven.
Canada Bread is investing in new freezers to raise its bagel production in the U.K. In addition, it's expanding its production of croissants. The company is also investing in advertising to support its sales in the U.K.
In North America, Canada Bread paid US$10 million in the second quarter to buy a facility and equipment from Interstate Bakery. It'll use the Washington state plant to "continue to improve efficiencies in its western manufacturing operations".
Canada Bread is also greatly expanding its warehouses at its plant in Virginia. It expect this to expand its storage capacity and reduce warehousing and distribution costs.
Canada Bread can afford to make more acquisitions and invest in its operations. For one thing, its net-debt-to-cash-flow ratio is a safely-low 0.9. For another, the company's rising cash flow exceeds its needs. Indeed, first-half cash flow of $63.1 million surpassed dividend payments of $3.1 million and capital spending of $41.8 million. This capital spending, in turn, greatly exceeded depreciation and amortization of $24.7 million.
We now expect Canada Bread to earn $3.28 a share. This is down marginally from our old forecast of $3.30 a share. The fact is, wheat should remain costly. And the rising loonie caused a negative translation adjustment of $10 million in the first half.
Canada Bread's long-term outlook is favorable. That's partly due to its growing business. Also, high wheat prices will likely lead farmers to grow more of this crop until the price stabilizes or even slips. Canada Bread Company, Ltd. (TSX-CBY) remains a buy for long-term gains.
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