The packaged- and processed-food industry has been on a tear.
That isn't surprising, given that these companies take commodity inputs, combine them, label them with their brands and sell them for elevated prices on a mass scale.
It is a great business model that is commanding a premium valuation multiple in the market. Campbell Soup's price-earnings ratio is 26.7, General Mills' P/E is 25.7 and J.M. Smucker's P/E is 26.5.
Packaged- and processed-food companies exist in a slow-changing industry.
Sure, there are trends in the food industry. People may want low-carb, organic or gluten-free, and packaged foods companies can adapt to these small changes.
But the overall business model hasn't changed much over the past 100 years because there will always be a demand for convenient food that tastes good.
Campbell Soup, General Mills and Smucker are all great businesses, but investors shouldn't buy them at these prices. Their P/Es have risen, and they certainly aren't a bargain.
Don't be fooled by the stock's low P/E ratio. Flowers Foods is a high-quality business.
The company is a Dividend Achiever because of its long dividend history. These stocks have 10 or more years of consecutive dividend increases.
There is a great opportunity to buy into Flowers Foods stock, even though the rest of the market is elevated, brought about by fear and what-if thinking.
Flowers Foods is so stable is because it sells a very slow-changing product: bread. Flowers Foods is the second-largest bakery in North America behind only Grupo Bimbo.
The company's bread and cake brands include Alpine Valley Breads, Dave's Killer Breads, Mrs. Freshley's, Nature's Own, Tastycake and Wonder bread.
Flowers Foods has expanded its operations both geographically and through acquisitions over the past decade. Earnings per share have grown an average 13.5% annually over this time period.
The company still has room for more geographic expansion in the U.S. as well as more potential acquisition opportunities in the highly fragmented baking market.
With a market capitalization of just $3.1 billion, the company's growth days aren't over. The company's management expects to continue compounded earnings-per-share growth of 8% to 10% a year over the long run.
This growth, combined with the company's 4.3% dividend yield, gives investors expected total returns of 12.3% to 14.3% a year at current prices.
The market used toreflect the company's quality and growth potential. Less than 12 months ago, the company was trading for more than $26 a share, but now it is below $15.
Why? The company's stock price has declined significantly primarily over legal fears.
Flowers Foods uses independent distributors to distribute much of its bread from bakeries to retail stores. These independent distributors aren't employees of Flowers Foods, so they don't get the benefits that a traditional employee would.
There are both pros and cons to being an independent distributor. What is important is that the whole baking industry uses the independent-distributor model, not just Flowers Foods.
Flowers Foods is being sued by 190 of its 5,100 independent distributors. The lawsuit claims that the company's drivers should be classified as employees, not independent contractors.
In addition to this lawsuit, the Department of Justice is also investigating Flowers Foods for this practice.
Fear over what will happen regarding the investigation and pending legal action is what has caused the stock to plummet.
But as Warren E. Buffett once said about investing in stocks, "Be fearful when others are greedy and greedy only when others are fearful."
It is time to be greedy and not fearful when it comes to Flowers Foods. The investigation and lawsuits will most likely be settled, though Flowers Foods claims no wrongdoing and is fighting the lawsuits vigorously.
The question is, if Flowers Foods does settle, how much will the company pay? FedEx settled a similar case for 12,000 drivers in June for $240 million.
Doing the math, this comes to $20,000 per driver. In the case of Flowers Foods, the settlement would be for $3.8 million for 190 drivers.
The complaint amount is in excess of $5 million, according to the Charlotte Observer.
A reasonable range of settlement costs is likely in the $3 million to $6 million range for Flowers Foods.
The company has $11.6 million in cash on its balance sheet, for comparison's sake.
Flowers Foods has seen its market capitalization decline by more than $2 billion because of a lawsuit that will likely be settled for well under $10 million. The stock is a bargain at these prices.
Long-term investors will likely see gains from a valuation multiple increase when the lawsuit is settled, returns from earnings-per-share growth and sizable income from the company's 4.3% dividend yield.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.