Don’t Write Off Flowers Foods, Inc. (FLO) Stock Yet

While there has been a bit of a fuss over Flowers Foods, Inc.’s (NYSE:FLO) compensation practices, it’s rapidly becoming clear that the financial impact should be minimal. Lifting that shadow once and for all should be a relief for management as well as Wall Street sentiment — which I’m happy to see, because it’s about time investors started to notice this stock’s potential.

Flowers Foods NYSE:FLOFLO is not only cheap by historical standards but deeply discounted enough to become a remarkable dividend play in its own right. With management raising the quarterly payout to 16 cents a share a few weeks ago, this stock will pay a guaranteed 4% at any price below $16, which makes it more attractive in terms of current income than all Treasury bonds and all but a handful of traditionally yield-rich utility stocks.

Locking in that dividend could buy you a floor on your expected return while you wait for the opportunity to sell your shares for additional upside.

Reasons to Love FLO Stock

With that in mind, FLO’s fundamentals give traders a lot of room to move. The baking business may not be growing fast, but it’s also not likely to go off any steep cliffs any time soon. That argument has been the backbone of Wall Street chatter around Flowers Foods for a while now.

Flowers Foods’ third-quarter earnings report was pretty much in line with the narrative the company had put forth following the release of its second-quarter numbers. Organic sales were down 0.6% as segments of the bread business remain weak and FLO’s largest brand, Nature’s Own, produced unsatisfactory results, but this is being offset by strength in organic categories led by Dave’s Killer Bread.

Earnings fell to 19 cents a share from 21 cents a share, with higher legal and marketing expenses hurting the bottom line along with soft sales.

The good news is that the forward story continues to look better. The initial diagnostics review of the company’s turnaround plan, Project Centennial, has been completed, and management believes a lot of promising cost-cutting opportunities have been identified. Plus, the continued roll-out of Dave’s Killer Bread throughout FLO’s distribution chain will help the top line.

So even though the first half of the year’s comparisons may be difficult, we should see some improvement in 2017 given EPS forecasts of 90 cents to 95 cents in 2016.

Right now the stock is at a low point, not even trading at 17X forward earnings expectations. But because estimates have been reeled in significantly, it’s important to keep in mind that this is still a company that can command close to 19X future earnings per share when cash rotates into traditionally defensive value plays.

That means its implied “peak” price target is a long way up from here.

It will probably take time and clarity on the legal front for FLO stock to reach those levels, but that’s where the dividend comes in as an incentive to park cash while you wait. Plus, any relief on taxes or employment regulations we see in the New Year will open up even more room for upside and could possibly send this stock soaring again.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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