Why I think there’s a lot more to come for investors from this super stock

I reckon Finsbury Food Group (LSE: FIF) is something of a super stock because of its decent value, quality financial indicators, and because of the business’s momentum. The firm operates in the UK as a baker of cakes, bread, and what it describes as “morning goods”, supplying blue-chip customers in the grocery retail and ‘out-of-home-eating’ foodservice sectors. There’s also an export operation selling to Europe, which generated around 13% of operating profit during the trading year to June.

Big in celebration cakes

A big part of the business involves making cakes under major licence agreements for big brands such as Disney, Thorntons, Mary Berry, Mars, Baileys, Weight Watchers, and others. The company’s major licensed brand business extends further with other licences aimed at growing the firm’s share of the celebration cake market in Britain, involving names such as The Simpsons, Peppa Pig, Hello Kitty, Me To You, and the Minions, as well as other “trend-led” brands. Finsbury claims to be the largest supplier of celebration cakes “to the UK’s multiple grocers.”

As well as cakes, the firm supplies artisan, healthy lifestyle and organic breads, rolls, muffins and morning pastries sold under brands such as Vogel’s, Cranks Organic, and The Village Bakery. Such names enjoy niche positions in the premium bread market, according to the firm.

Finsbury has just completed the acquisition of free-from baker Ultrapharm, which marks a move aimed at expanding into that high growth area. Meanwhile, today’s full-year results are steady, with like-for-like revenue 2.4% higher than the previous year, adjusted basic earnings per share 4.1% higher, and net earnings down 10.5% at £15.6m. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 10%.

Navigating the inflationary environment

During the year, the company struggled with what it describes as “an unprecedented inflationary environment” and had to close a loss-making bakery in London after the rising cost of butter rendered the operation uneconomic. Nipping and tucking like that strikes me as a healthy way to manage the business, rather than clinging on to a losing situation in the hope things will get better. In other areas, the company is thriving. For example, it has doubled sales of artisan bread after investing in the area during 2016.

Although demand in the firm’s food markets can be steady, I reckon the industry is competitive, which tends to leads to thin profit margins. That’s why it’s important for the firm to remain responsive to changing market conditions. Chief executive John Duffy said in today’s report that the firm’s ongoing capital investment programme and “relentless efficiency focus of recent years” has enabled it to cope with the challenging market environment and to maintain its profit margin.

The outlook is positive with the directors expecting steady organic growth. I reckon the company has demonstrated its ability to survive and thrive in its cutthroat markets. The stock is therefore well worth your research time now.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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