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If you're into sweets, you've probably tasted at least one of the many products made by Tasty Baking (
TBC
), a major independent U.S. bakery that specializes in fun foods and snacks, including cakes, cookies, donuts, pastries, and pretzels. Now it looks like Tasty's shares are becoming as tempting as its products. So say some money pros who note that recent trading reveals some renewed accumulation in the stock. The reason, they surmise, is that Tasty appears more and more to be a buyout target in the currently consolidating food industry.
Although small -- with a market cap of about $100 million -- this Philadelphia-based Big Board-listed company has been around for 85 years. Currently trading at 11 3/8 a share, the stock spiked up in mid-October to more than 15 as rumors sizzled that Tasty was being pursued by Interstate Bakeries (
IBC
), which produces a wide array of breads, rolls, snacks, donuts, sweets, and related products.
Reflecting the usual investor impatience, shares of Tasty started slipping when no confirmation about a buyout came along. But the takeover story isn't finished by any means.
QUIET GRAB. In recent days, big-block bids totaling 10,000 to 20,000 shares have shown up in buy orders at 11 a share. These show, traders say, that some pros are moving to accumulate shares without meaning to stir up notice and boost the stock unnecessarily. Investors and traders with an inventory in the stock have chosen not to sell at those prices because they anticipate higher prices ahead, according to some analysts who keep tabs of daily trading. "Something is going on," says one trader.
According to a money manager who has been accumulating shares in Interstate Bakeries, informal talks between IBC and Tasty regarding a possible deal have occurred. In the past, IBC Chairman and CEO Charles Sullivan has stated publicly that one of the companies it would like to acquire was Tasty Baking.
"We can't say that there's a deal brewing, or whether or not Interstate is interested [in buying Tasty], but there's no question that the strategic fit is right between the two companies," says G. Leonard Teitelbaum, an analyst at Merrill Lynch who follows Tasty. The analyst, who rates the stock as a short-term accumulate and a long-term buy, says although Tasty has publicly said that for the time being it wants to remain independent, "we continue to believe that the best solution for Tasty in the long term is to become a part of a larger operation."
SUPPLYING WAL-MART. Teitelbaum notes that although Tasty has posted impressive numbers in sales and earnings over the past four quarters, the company faces tougher comparisons in the fourth quarter. To fully compete in the wake of the consolidation in the retail trade, and given the increasing demands of customers, the argument goes, Tasty will have to get larger in resources and capacity. "The smaller companies like Tasty will have a harder time competing in the current environment," warns Teitelbaum.
The analyst notes that some 50% of Interstate Bakeries' sales comes from cakes and snacks. Its brand-name products include Wonder bread and Hostess and Dolly Madison cakes.
One of the big positives in Tasty's horizon is its contract to provide some of its products to Wal-Mart. Right now, Tasty supplies around 950 supercenter Wal-Mart stores through 14 distribution centers. In the current year, Tasty's net sales (excluding promotional sales) to Wal-Mart represent about 5% of projected net sales of $160 million, figures Teitelbaum. That could balloon to about 7% to 8% of estimated net sales of $170 million in 2001. Teitelbaum says Tasty has confirmed that it anticipates booking sales of $11 million to $12 million annually from Wal-Mart.
FANCY PREMIUM. Tasty is also distributing its products directly to grocery giant Safeway's Northern California distribution center, and it expects new business to come from Big K, another major retailer, in 2001.
Teitelbaum estimates Tasty will earn $1 to $1.05 per share this year and $1.10 to $1.15 next year. His price target for the stock is 16, and in a buyout he thinks it could be worth 19. Other money pros contend that Tasty could fetch more than 20 a share in a takeover. That would be sweet, indeed.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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