Go With the FLO and its Wonder-Full News

NEW YORK ( TheStreet) -- Everyone I speak with, whether they eat junk food or they hate it, has heard about the bankruptcy of Hostess Foods. The infamous maker of Ding-Dongs, Twinkies and Devil Dogs is parsing itself out to the highest bidder.

When it comes to its equally famous Wonder Bread, Nature's Pride and Merita bread brands, they've found a buyer who offered to pony up a huge amount of monetary "bread." Flower Foods ( FLO), the Thomasville, GA-based food company with some famous names of its own, bid $390 million for Hostess' prize bread names.

FLO, with a current market cap of $3.43 billion, produces and markets bakery products throughout the U.S. It operates in two segments; direct store delivery and warehouse delivery. When you look at these two divisions you'll better understand how it generated $21.68-per-share ($2.95 billion) in revenue during the trailing-12-months ending Oct.6.

The DSD segment produces fresh bakery foods, including fresh breads, buns, rolls, tortillas, snack cakes, pastries, pies, brownies, cupcakes, sandwich rounds, sandwich rolls and hot dog rolls and thin sliced bagels, as well as chocolate bells and muffins. Yet it's FLO's brand names that ring the cash registers.

These include Nature's Own, White-Wheat, Cobblestone Mill, Tastykake, Blue Bird, Butter Krust, Dandee, Mary Jane, Mary Jane and Friends, Evangeline Maid, Captain John Derst, Country Hearth, Natural Grain, Flowers Foods, Mi Casa and Frestillas brands. FLO also markets regional franchised brands such as Sunbeam, Roman Meal, Bunny, Holsum and Aunt Hattie's. Oh, the childhood memories!

Let's take a look at how the shares of FLO have performed pricewise on the following one-year chart. When we also look at the trailing year-over-year diluted quarterly earnings-per-share, one can't help but wonder if the market is anticipating big EPS gains when FLO reports on Feb. 7. FLO Chart FLO data by YCharts

Flower Foods has done an impressive job of growing both organically and through well-timed, reasonably priced acquisitions. No wonder the return-on-equity (TTM) is over 14% and its operating cash flow is nearly $222 million.

OK, I can't resist the following pun: All the good news is already "baked into" the share price. FLO has a great deal of debt -- $604 million as of the last quarter -- and with the purchase of the Hostess bread brands that debt will be soar to almost $1 billion!

Yes, it has been paying a sweet dividend with a yield-to-price currently of nearly 2.39%. But that dividend equals a payout ratio of 70%, which in the food and bakery business is dauntingly high and perhaps unsustainable. Now with the news on the Hostess deal shares spiked 8% on Monday the 14th.

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No wonder insiders and beneficial owners (5% owners) who collectively hold 12% of FLO's outstanding shares have been slowly selling as the stock's price has been ascending. Director Amos R. McMullian's reported holdings alone, as of Dec. 5, were close to an impressive 2.435 million shares.

CEO George Deese, whose annual compensation is a comfortable $1.54 million, owns nearly 1,337,000 shares. At the current share price approaching $27, that's over $36,000,000 worth of commitment. It should be pointed out that insiders aren't selling large amounts, just a little at a time.

Perhaps that's because with the good news about the Hostess acquisitions (which generated just under $1 billion in sales last year), Flower Foods is on the verge of a big year ahead in revenue, operating income and EPS. Added to the $3 billion in FLO's current annual sales and the aroma of fresh-baked loaves of bread also includes the scent of much-needed cash flow.

So my take on FLO is if you'd like to join McMullian and Deese as shareholders, it might be prudent to cool your heels for awhile. The stock price appears to have gotten ahead of itself from a technical as well as a fundamental perspective.

With a forward (one-year) price-to-earnings ratio of 21 and a price-to-earnings-to-growth ratio of a lofty 2.87, I'd wait till the stock settles back to $23 or below before I'd be a buyer. Since FLO is planning to finance the deal with Hostess, investors are wise to remember how that adds to the company's total debt load.

At the very least, study the company, watch the news and press releases from Flower Foods, and resolve to buy the dips and to not overpay. If you own the stock consider a tighter trailing stop alert to preserve your gains.

At the time of publication, the author held no positions in any of the companies mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.