CANADA BREAD CO. LTD. $41 (Toronto symbol CBY; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 25.4 million; Market cap: $1 billion; Price-to-sales ratio: 2.5; SI Rating: Above Average) is Canada’s second-largest maker of fresh and frozen breads, rolls and bagels. (Weston Bakery is the largest). Canada Bread also makes pastas and sauces. Its main brands include Dempster, Tenderflake and Olivieri.
As part of its long-term growth strategy Canada Bread plans to expand its overseas operations, which account for 25% of its sales. It’s now one of the largest makers of bagels and bakery products in the U.K. Canada Bread also owns three bakery plants in the U.S.
In the first half of 2008, Canada Bread raised its prices to offset rising energy and wheat costs. Now that these costs have fallen, the company is starting to realize the benefits of this move. In the three months ended March 31, 2009, its earnings rose 22.9%, to $0.59 a share (or a total of $14.9 million) from $0.48 a share (or $12.2 million) a year earlier. These figures include unusual items, such as costs related to a fire at a bakery plant in the U.K. The company received $1.7 million in insurance proceeds to repair the damage. If you exclude these items, earnings per share rose 15.4%, to $0.60 from $0.52. Sales rose 7.9%, to $413.1 million from $382.9 million.
Canada Bread’s $13.7-million long-term debt is a low 1% of its market cap. The company also holds cash of $10.8 million, or $0.43 a share. Canada Bread plans to use innovative new products, like breads that help improve digestion, to further lift its earnings. Premium products like this generate higher profit margins than Canada Bread’s regular breads and pastas.
The company’s recent launch of its new Dempster’s Healthy Way ProCardio breads and snack bars is a good example of this strategy. These products have less sodium and fat than regular breads, so they help lower the risk of heart disease. As part of the launch, Canada Bread spent $5 million on advertising in the latest quarter, so it was actually more profitable than it appears.
Canada Bread’s shares now trade at 17.1 times the $2.40 a share the company will probably earn this year. The $0.24 dividend yields 0.6%. Maple Leaf Foods Inc. owns 89.8% of Canada Bread. This high level of control hurts Canada Bread’s liquidity. Despite this, we would still recommend Canada Bread on its own merits. But we feel investors are better off buying Maple Leaf instead.
Canada Bread is a hold.
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