Dempster’s bread is pictured in a Rabba store on Front St. in Toronto on April 14, 2006.Deborah Baic/The Globe and Mail
Canada Bread is starting to get a bit rich.
The stock has surged again Tuesday and is now close to $71, taking the company's market value to $1.8-billion, in the wake of parent Maple Leaf Foods saying it may sell the bakery. At that level, it's getting to the area where any deal would get done.
That market capitalization is 1.17 times sales. It's a level that is above where some big rivals trade, and is in the range where bakery acquisitions seem to take place.
Grupo Bimbo paid about 1.1 times sales when it bought the U.S. bakery operations of George Weston five years ago. Aryzta AG paid about 1.2 times sales when it bought German baker Klemme AG earlier this year.
Other bakers currently trade roughly around 1.1 times sales as well, including Aryzta and Bimbo. The outlier is Flowers Foods, which is valued at 1.4 times sales. The issue for Canada Bread is that its top line growth is much smaller than any of the others.
On an enterprise value to ebitda level, there might be a little more room.
Canada Bread is now fetching 9.4 times times what analysts expect for 2013 ebitda, according to Bloomberg. The consensus estimate from Bloomberg is that 2013 ebitda will be $177-million.
Arytza trades at an enterprise value to ebitda ratio of 9.7 times forward earnings, Bimbo at 13.8 times and Flowers at 12.3 times.
Again, the issue when comparing Canada Bread to other firms by that metric is growth. Flowers, Arytza and Bimbo arguably deserve to trade at richer levels because they have more revenue growth.
One final comparison: Bimbo paid 8.8 times earnings before interest, taxes, depreciation and amortization for the Weston business. That multiple yields a price of $1.6-billion for Canada Bread.
None of this says that Canada Bread might not be worth a bit more than the market is now pricing in. It does, however, suggest that there's not much more value there than the market is discounting after Tuesday's gain.