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5 high-carb stocks Atkins can't lay low
The latest diet craze has declared war on carbohydrates. But purveyors of the sweet and tasty are surviving and thriving by cutting their own carbs -- or simply ignoring the trend.
By Michael Brush
Lets call them the Atkins Survivors, companies boldly cranking out carbohydrate-heavy breads, baked desserts and packaged snacks and making a good business of it even as carb-phobics shun their products.
Our Atkins Survivors bake, butter and glaze downright sinful treats, like Tastykake Butterscotch Krimpets, sold by Tasty Baking (TBC, news, msgs) in the mid-Atlantic states. Or Mrs. Freshlys glazed honey buns from Flowers Foods (FLO, news, msgs), which operates in the South. Or how about Sara Lee (SLE, news, msgs) 20-oz. blueberry bagels, lurking on bakery aisles nationwide?
At first glance, it looks as if any of these companies could be Krispy-Kremed at any moment. That is to say, their stocks could suffer a painful 43% decline in two months -- just like the famous Krispy Kreme (KKD, news, msgs), whose earnings purportedly hit the wall in part because of the Atkins diet.
But precisely because so many investors are probably passing on our Atkins Survivors, it makes sense to consider taking positions and waiting for the doubters to catch on that Atkins isnt really such a threat to these businesses. Why not?
The trend may help them
Because if you take a good look inside, our Atkins Survivors actually benefit from several positive trends that might lead to higher share prices ahead. - Taking Atkins on: First, many are facing the Atkins craze head-on. From Flowers Foods to the tiny Fairfield, N.J.-based Creative Bakeries (CBAK, news, msgs), which specializes in cheesecake, theyre all coming out with low-carb variations of their high-carb breads, cakes and desserts. And consumers are munching down these new low-carb offerings in big numbers.
- Consumers want treats: Many customers tell these companies they value their products as a perfectly acceptable indulgence and reward in the midst of a busy day. When they pick up that Tastykake chocolate cupcake or Sara Lee iced fudge nut brownie, counting carbs is the last thing on their minds.
- Turnarounds rebuilding: Tasty Baking, Sara Lee and Creative Bakeries are turnarounds -- relatively cheap companies fixing whats broken, with the promise of higher share prices ahead.
- Atkins hedges: Some of our Atkins Survivors simply have a natural hedge in place. As a big producer of grain, for example, Archer Daniels Midland (ADM, news, msgs) might look like the all-time Atkins loser because it processes the grains used to make so many carb-laden products. But it also sells grains to farmers raising livestock that will feed meat-hungry Atkins dieters. Their voracious demand for meat helps drive grain prices higher, which is good for Archer Daniels Midland. And Sara Lee, which makes a lot of high carb breads and desserts, also sells meat -- where profits are rising, thanks to Atkins.
So like a good dieter who has the wisdom to throw caution to the wind from time to time, we invite you to consider nibbling on a few of these five Atkins Survivors which you might otherwise ignore, if you let the diet fad du jour rule your investment thinking.
Flowers Foods
As a company that mostly makes bread, Flowers Foods is exactly the kind of business youd expect to be hit hard by the Atkins diet fad. But Jimmy Woodward, the companys finance chief, maintains the Atkins diet has actually helped sales because it has refocused consumer attention on healthy eating. That plays right into one of the main strengths of Flowers Foods -- a line of bread and baked products called Natures Own. The brand's products are considered healthy because they use no artificial flavor, coloring or preservatives.
Related news and commentary on MSN Money
Of course, it didnt hurt that Flowers Foods was the first major bakery to reach the market with a low-carb bread, released last February under the Natures Own brand. (The bread contains about half the carbs of regular white bread.) This low-carb offering helped sales in the Natures Own division grow in the double digits in the most recent quarter.
What is driving our growth is the Natures Own brand, Woodward said. The line makes up about a third of Flowers Foods overall revenue. The company, which operates mainly in the South, also is planning low-carbohydrate buns and rolls.
In addition, Flowers Foods has mastered scan-based trading. Thats a system in which food suppliers like Flowers take full responsibility for placing the correct amount of their products into supermarkets and setting up their own displays. Grocery stores pay only when a product is scanned and purchased. This reduces risk for the stores and makes deliveries faster, because there is no check-in process at the loading dock.
So drivers have an extra hour to work on merchandising rather than waiting in line in back of store, says Woodward. The companys skill at using scan-based trading is one key reason it is entering new markets, most recently in Missouri and the Washington D.C. area. Its also launched a new line of products designed to appeal to Hispanics.
Flowers Foods has a strong balance sheet and pays a 40 cents a year dividend, which works out to a yield of 1.4%. Its also in the midst of a share buyback program. And since the end of March, insiders including Chief Executive George Deese and Chief of Finance Woodward, have scooped up $156,000 worth of Flowers Foods shares in the $24.65 to $25.65 range. Both get high marks from Thomson Financial for making astute purchases in the past. Flowers Foods also saw decent upward estimate revisions at the end of May -- often a sign of positive trends that continue to play out.
Tasty Baking
If you had to think of a good name for an Atkins diet victim in the stock market, you couldnt do much better than Tasty Baking Company, right? But thanks to a turnaround thats in the middle innings, not to mention some new low-carb offerings, this company could reward patient investors who dont mind waiting a year or two for the payoff. Not what youd expect from a company that sells sweet- and carb-heavy packaged snacks like pies, cupcakes, honey buns and butterscotch krimpets.
Tasty Baking is under new management that includes a chief executive and marketing director with experience at Campbell Soup (CPB, news, msgs). Theyve taken the bold step of reversing the heavy discounts that were once used to drive volume. As expected, sales were hit hard. But gross margins are up.
Now its a matter of bringing enough excitement back to the brands -- with tactics like a marketing campaign, new packaging and a little more filling in its treats -- to offset the difference. A year from now, two years from now, we will see the real benefit of the price increase, says Finance Chief David Marberger. You lose a lot of volume, but we think it will come back.
The company also is adding routes in Maryland, Pennsylvania and Ohio, and working on putting more products onto the shelves of existing clients. The big thing funding all this is company focus on productivity, watching costs, says Marberger. Tasty Baking is taking the Atkins diet craze head-on by introducing a new line of low-carb snack products called Sensibles. The company had good upward earnings estimate revisions at the end of April.
Sara Lee
Well-known for its baked goods, the food division of Chicago-based Sara Lee actually has a natural hedge against any losses to the Atkins diet. About 40% of the revenue from this division comes from meats, which, of course, do well because of the Atkins fad.
Sara Lee also recently introduced a low-carb bread, called Sara Lee Delightful. But beyond that, the company doesnt think it needs to roll out low-carb versions of its dessert and packaged snack line up. "We have been told by our consumers that when theyre looking for our desserts, theyre looking for indulgence," says Julie Ketay, who handles communications for the company. "They are not looking for low fat or low carb, so that is not something we wanted to tinker with."
Sara Lee is light on one thing -- valuation. Trading at just 15 times trailing earnings, Sara Lee is a holding of value manager John Buckingham, the man at helm of the Al Frank Fund (VALUX), up 33% in the last 12 months. He also holds Sara Lee in his personal account. Buckingham thinks it makes sense to buy the stock a little above $21, or $2 below recent levels of around $23. He has a price target of $43.
What might help it get there? The company is a turnaround in progress. A 1960s-style conglomerate, Sara Lee has a hodgepodge of brands. They range from Sara Lee, IronKids, Earth Grains, Ball Park and Jimmy Dean in food (which account for about half of sales); to Haines, Playtex, Bali and Champion in clothing; and Kiwi shoe polish in household goods.
The company recently went through a housecleaning, deciding which brands to develop, which ones to maintain and which ones to milk for cash. Its also weeding out smaller brands in the Earth Grains bakery goods company it bought in 2001. At the same time, Sara Lee is rolling out new variations of successful food-product brands.
Archer Daniels Midland
One of the main processors of grains, Archer Daniels Midland might seem like another potential Atkins victim. But in reality, theres no shortage of demand for grain. You can chalk it up in part to the need to feed all that livestock being consumed by Atkins dieters. But strong worldwide demand from places like China also helps. So does increased demand for ethanol, an additive made from corn that helps gasoline burn cleaner. The bottom line: grain prices are at multi-year highs, and thats good news for Archer Daniels Midland.
"It is a very commodity driven company," says Bill Ferguson, an analyst at Value Line, which has the company on its buy list. "It is in cyclical businesses, and the business is in an up-cycle. Feed costs for animals have risen, and that is driving a lot of their processing business."
The company has good upward earnings estimate revisions and solid insider buying. And despite the run to $16.30 from $12 a year ago, it is still a favorite among value players. Buckingham, who holds the stock, thinks it is a buy at $16.06. He likes the fact that the company trades for just 1.3 times book value and pays a dividend yield of approximately 1.8%. "It is a financially sound company, and I still think there is pretty decent growth potential over the long haul," says Buckingham.
Creative Bakeries
Insiders at this tiny producer of cheesecake recently bought about $200,000 worth of shares for 21 cents a share. That looks like an endorsement of a turnaround in progress. Creative Bakeries is doing everything from renegotiating leases to streamlining its product line and seeking capital for more acquisitions, says Ron Schutte, president of the company. Does Atkins cloud the future at Creative Bakeries? Schutte doesnt think so. People who eat cheesecake are always going to eat cheesecake, he says. But just in case, Creative Bakeries is launching a low-carb version of its dessert to please the Atkins crowd.
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