Stocks to watch on Tuesday: CE, IEX, SONC >>> READ MORE

Soaring Wheat Won’t Crush Bread-Bakers

Companies like Panera, Flowers know how to roll with the punches


It’s been a tough year for farmers, who first had to face the worst drought since the 1930s only to be greeted by the coldest start ever to wheat-growing season.

The record freeze is expected to force about 25% of hard red winter wheat — the most common variety, used for many breads and in all-purpose flours — to be abandoned. As a result, wheat prices, which have been on a downward trend since last November, are expected to start soaring … and soon.

So other than in grocery aisles, where could we expect these price increases to roost?

Well, a couple companies come to mind — specifically, bread-bakers Panera Bread (NASDAQ:PNRA) and Flowers Foods (NYSE:FLO). The snap logic would seem that if anyone would feel the burn of a wheat crop freeze, it’d be companies specializing in bread.

But do investors actually have a reason to be worried? Digging deeper, it doesn’t look like it. Let’s take a look at each company to see why.

Panera Bread

If past is precedent for Panera, don’t expect much turmoil here.

Despite the fact that the national bakery-cafe offers loaves, muffins, bagel, pastries, sandwiches and more, PNRA has dealt just fine with rising wheat prices in the past. By Q2 2011, for example, the cost of hard red winter wheat had been steadily increasing for nearly a year, averaging just under $340 per metric ton for the three-month period — nearly double its price the year prior.

You’d think that would have weighed on Panera. Well, PNRA stock did take a hefty haircut after it announced earnings for that period, but the clamor actually was about softer-than-expected sales. Profits, on the other hand, actually managed to climb the bar. If bread costs had been the culprit for the drop, margins would have thinned and earnings would have been hit as well.

Of course, there have been times — in early 2009 and late 2012, for example — that lower wheat prices have helped the company’s margins and thus, its bottom line.  But when it comes to higher wheat prices, Panera seems to be able to make necessary adjustment to keep things rolling smoothly.

Flowers Foods

The same holds true for Flowers Foods, too. The company, which operates 44 bakeries, is responsible for names like Nature’s Own bread, Tastykake snacks, Sara Lee, Sunbeam breads and, as of recently, some Hostess brands like Wonder and Nature’s Pride.

If you use snap logic again, a baking company would seem to hinge pretty heavily on wheat prices.

While this year’s performance would seem to bear that out — FLO has soared 40% in 2013 while wheat prices have shot lower — the real driver hasn’t been commodity prices, but instead action on the mergers & acquisition front. Hostess’ bankruptcy, the subsequent speculation that Flowers would buy some of its brands, and the deal actually going through all served to power FLO’s outsized performance.

And if you look at the company’s margins over the past decade, you’ll see further evidence that Flowers doesn’t live and die by the cost of wheat.

Gross margins have been steadily declining since 2003. Thing is, from 2003 to 2008, wheat doubled from a price of $130 per metric ton, and gross margins shed a percentage point. But from 2008 to 2010, wheat prices turned tail … and Flowers’ gross margins continued to fall.

However, Flowers has been able to keep its operating margins intact.

Even as gross margins have been falling, operating margins have actually been steadily improving — from 5.4% in 2003 to more than 6% in 2005 and 8% in 2010.

And FLO stock? Up 750% since 2003 — almost 10 times better than the S&P 500.

The takeaway: Flowers is an efficient enough operator that it can handle fluctuating input costs — including spiking wheat prices.

The Bottom Line

While it might seem obvious that a hike in input costs will impact companies that rely on a certain commodity, many of these companies are well-equipped for such fluctuations and can not only weather such storms, but thrive in them.

So investors in PNRA and FLO shouldn’t panic as the headlines pile up about more expensive wheat. It’s hardly their first rodeo.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities. Follow her on Twitter: @alyssaoursler.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC