Why Goodman Fielder Ltd’s shares crashed down 20%

Bread maker’s business is crumbling

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Food producer Goodman Fielder Ltd (ASX: GFF) has seen its share price crash by 20% in early morning trade, after the company lowered its 2014 earnings guidance by 10-15% below current analysts’ forecasts.

The company says it expects earnings before interest and tax (EBIT) for the 2014 financial year to come in between $153 to $163 million. Additionally, Goodman Fielder expects to record more impairments, and is unlikely to reduce its net debt position as previously reported. That’s a triple play of bad news.

The company says trading conditions have deteriorated in Australia and New Zealand, while cost savings have been delayed. In New Zealand, dairy prices have increased, impacting earnings in the short term, until costs can be recovered from customers. High manufacturing costs, including labour expenses means Goodman Fielder struggles to compete with imported products too, much like our steel manufacturers and SPC Ardmona have found.

Competition remains Goodman Fielder’s main issue, with home brand products in the major supermarkets Woolworths Limited (ASX: WOW), Coles – owned by Wesfarmers Limited (ASX: WES), and IGA stores – supplied by Metcash limited (ASX: MTS), driving down prices for the company’s premium branded products.

The problem for Goodman Fielder is that it has never been able to generate decent returns on capital employed over at least the past twenty years, apart from one or two outlying years. Continually having to invest in property, plant and equipment makes it a capital intensive business, and the company has zero competitive advantage. In 1993, Goodman Fielder generated $3.98 billion in revenues – since then it’s all been down hill, with the company bringing in just $2.1 billion in 2013.

High levels of debt have hampered the company rather than it being able to utilise the additional leverage to drive better performance in its various divisions. Add in the fact that directors hold less than 1 million shares between them, out of close to 2 billion on issue, and there’s one factor that doesn’t align directors’ interests with shareholders. If directors aren’t prepared to invest in the business, investors may want to ask why they should.

Foolish takeaway

If you’re thinking that the price fall offers an opportunity to buy Goodman Fielder on the cheap, be aware that this looks more like a value trap than a value play. Goodman Fielder is not investment grade, and there are plenty of other opportunities in the market.

Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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