Acquisitions and restructuring lift Canada Bread: bread and specialty foods maker now back on track after Multi-Marques acquisition

Money Digest, May, 2002 by Patrick McKeough

Canada Bread Co. Ltd. (TSE: CBY; Recent price: $21; Rating: above average) is Canada's second largest maker of fresh and frozen breads, rolls and bagels, behind Weston Bakery. It also makes specialty pastas and sauces.

The company sells to major grocery chains, retail outlets and the food service industry. Canada Bread's main brands are Dempsters, Olivieri and Tenderflake. It also makes products under private label brands for grocery stores and fast food chains. Maple Leaf Foods Inc. owns 68% of Canada Bread.

In October, 2001, the company paid $136.0 million for the 75% of Multi-Marques Inc. that it didn't already own. Multi-Marques operates 11 bakeries in Quebec and one in Ontario. Canada Bread also owns 60% of Ben Bakery, a company that operates three bakeries in Nova Scotia and New Brunswick. To satisfy federal competition regulators, Canada Bread agreed to sell some of its food service operations in Atlantic Canada.

The company was virtually debt free before the Multi-Marques acquisition. But the purchase raised long-term debt to $36.3 million. That's still only 0.14 times equity.

The deal also raised the amount of goodwill on Canada Bread's balance sheet by 71%. Consequently, tangible book value (excluding goodwill) fell to $5.80 a share from $7.53 a share a year earlier. Multi-Marques also helped raise cash flow per share 40.1% to $2.41 in 2001 from $1.72 in 2000.

Revenues fell from $515.4 million in 1997 to $508.4 million in 1998. Revenues rose 11.6% to $567.3 million in 1999, mostly due to a new supply agreement with A&P supermarkets. But revenues fell to $553.7 million in 2000 as new management cut several unprofitable lines and improved sales of its core brands. Revenues in 2001 rose 22.5% to $678.3 million, mostly due to the Multi-Marques purchase and higher sales by its U.S. subsidiary.

Profits before restructuring charges and other unusual items fell from $27.1 million or $1.27 a share in 1997 to $11.7 million or $0.55 a share in 1999. But the company's restructuring efforts started to pay off, and profits in 2000 climbed to $17.2 million or $0.80 a share. Profits in 2001 jumped 21.5% to $20.9 million, or $0.97 a share.

The stock hovered around $10 a share for much of 2000, but nearly doubled in 2001. It now trades at 15.1 times the $1.39 a share it should earn in 2002. It also trades below its sales per share of $31.70. The $0.24 dividend yields 1.1%.

Canada Bread is a buy.

Patrick McKeough is a fee-based investment manager and a publisher of investor newsletters. This article is extracted from the Successful Investor (ste. 977, 6021 Yonge St., Toronto M2M 3W2; phone 416-756-0888; toll-free 1-888-292-0296; fax 416-756-0379).