Value Library

The following is an excerpt from the ABC Perspective - April 2002 - Pg. 4-5

We are often asked how we pick stocks to add to our ABC investment portfolios. In response, we refer to our ABC Ten Commandments of Value Investing. But some questioners want a more graphic explanation since the art of stock picking remains a very complex, black box process to them. As a more definitive response I would like to refer to our www.valueinvestigator.com web site and the Canada Bread story under the "Value Favourites" section.

When we launched our Value Investigator web site in May 2000, we decided to outline a number of our value favourite shareholdings for clients and prospects who did not have the opportunity for close contact with our Toronto office or our monthly investment seminars. This process of writing up stock selections and dispositions, we believe, has worked quite well. While describing our common share holdings has assisted our clients in understanding our investment style and thought processes, it has also disciplined us as analysts to write coherent and logical commentaries. Moreover, since this information is posted on our web site for all to peruse we are particularly sensitized to what we write.

To better explain the anatomy of our ABC stock selection process we decided to offer our full two-year commentary on the Canada Bread Company Ltd. This chronology offers our initial description and purchase rationale of the company, then at $10. This is followed by a series of follow-up comments plus our latest views on the stock, which just closed at $24.40. Hopefully this exercise will provide a better understanding of our ABC selection disciplines, analytical skills and investment patience.

Canada Bread Company Ltd.

May 25, 2000
In business since 1911, Canada Bread Company is a leading manufacturer of value-added flour-based products in Canada. The Company's product line includes a variety of bakery goods such as fresh and frozen bread, bagels and dough, par-baked products and specialty pasta and sauces. Canada Bread's products are sold and distributed through private and company brand name labels, primarily under the popular banners of Dempster, Tenderflake and Olivieri.

With over $500 million in sales, incentives such as new contracts, innovative products and frozen exports will drive Canada Bread's growth. The company also has a 25% interest in Quebec-based Multi-Marques Bakeries. Canada Bread Company is 68%-owned by Canada's largest food processing company, Maple Leaf Foods Inc.

The buzz phrases of "old economy" and "new economy" have become the subject of a great deal of hype in the stock market over the past year. Recently, it seems that investors have begun to trek back to the "old economy" stocks and Canada Bread is a prime example. The intriguing aspect of this fundamentally strong company is its current price of $10.00, which is a steep decline from $30.00 at the beginning of 1998. Canada Bread is trading at 7.3% discount to its 1999 book value of $10.79, with a 2.4% dividend yield.

Supporting its strategic initiatives, Canada Bread enjoys a healthy balance sheet with a strong cash position and very little debt. The company has a $10.79 book value with about $3.60 of goodwill. We feel that the goodwill is substantiated with its well-known brands such as Dempster and Tenderflake. Further enhancing Canada Bread's balance sheet is its hidden asset of a $15.6 million pension surplus or $0.73 per share.

Taking into account Canada Bread's aggressive strategies, new management and improving fundamentals, we believe that Canada Bread will gradually emerge from its downturn to provide excellent long-term capital gain potential.

September 15, 2000
Canada Bread's new management team and restructuring strategies have begun to positively impact the company with its fourth consecutive quarter of improved earnings. The company reported second quarter 2000 earnings of $0.14 versus $0.11 in the comparable quarter of 1999, representing a 35% increase. This increase was due to the discontinuation of unprofitable product lines, operating and sales improvements, reduction of waste and better pricing. This result is a reflection of the company's ability to keep with its new, disciplined initiatives. Not only did Canada Bread's results further confirm our confidence in the company's strength but its stock price has also begun to show signs of improvement as investors have begun to take notice.

January 26, 2001
We applaud Canada Bread's latest attempt to create shareholder value. On January 20, Canada Bread announced that it reached an agreement to purchase the 75% of Multi-Marques that it did not already own. Canada Bread has nurtured a long time partnership with Multi-Marques and we feel that the two companies are an ideal strategic fit. We expect that the purchase will be mildly accretive to 2001 earnings and should improve 2002 earnings by more than $0.05.

In the meantime, we are patiently waiting for Canada Bread's share price to reap the benefits of Roger Dickhout's adept management team. We feel that management will continue to be opportunistic and have done an excellent job in turning around the company despite fierce competition.

May 11, 2001
Canada Bread recently reported better than expected first quarter 2001 earnings per share of $0.16 versus $0.11 in the year earlier period. This 45% earnings increase is largely the result of a 4.8% growth in sales and a significant margin expansion of 74 basis points. This year-long trend of quarter over quarter improving results is indicative of Canada Bread's future. We are confident that management will continue to knead out margin improvements through its ongoing aggressive cost cutting strategy that was implemented over a year ago.

October 12, 2001
In the second quarter of 2001, Canada Bread improved its earnings per share by 18.9% over the comparable quarter. A 6.3% increase in revenues and an 8 basis point improvement in its operating margins to 4.6% augmented its earnings growth. We feel this will be sustained as new product lines and cost cutting measures develop. In addition, it is expected that the proposed acquisition of the remaining 75% of Multi-Marques will close by the end of the fourth quarter.

Although Canada Bread's share price has appreciated significantly since our initial write-up we will continue to hold at these levels. It is a fundamentally strong, old economy company with a small amount of debt. We feel that its defensive nature, positive earnings momentum and potential catalytic events that may transpire with its major shareholder, Maple Leaf Foods, could drive its share price up further.

March 1, 2002
Canada Bread's recently reported fourth quarter earnings results marked its tenth consecutive quarter of year over year improvement in operating earnings. Canada Bread's earnings per share for the fourth quarter of $0.34 were fuelled by a 71% increase in revenues over the comparable quarter and continued margin expansion. For the full year Canada Bread's earnings per share were $0.97, an improvement of 45% over the previous year's $0.67.

Although Canada Bread's acquisition of the remaining 75% of Multi-Marques in October 2001 contributed to the company's impressive sales growth, Canada Bread still managed to achieve an internal sales growth of 13%. As Multi-Marques is further integrated into Canada Bread, we expect an improvement of operating margins which will further enhance the bottom line.

Overall, we feel that Canada Bread is well positioned for future growth. The company remains fundamentally strong with a book value of $11.74 and a debt to total capital ratio of only 0.15. While a little pricey on a book value and a P/E ratio basis, Canada Bread remains a core holding due to its defensive nature. Interestingly enough, its 68% shareholder, Maple Leaf Foods could grow the company by merging Maple Leaf's U.S. bakery operations and/or they might even decide to liquidate their Canada Bread interest and concentrate on pork and meat processing. In the event of this latter option, Canada Bread could be an interesting takeover target.

Irwin A. Michael, CFA