Deutsche Bank Loses Appetite For Hostess Brands, Dean Foods

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Deutsche Bank analysts lost their appetite for two food companies Monday, including Twinkies maker Hostess Brands Inc TWNK and major conglomerate Dean Foods Co DF.

The Analyst

Deutsche Bank's Rob Dickerson downgraded Hostess Brands' stock rating from Buy to Hold with a price target lowered from $16 to $14. The analyst also downgraded Dean Foods' stock rating from Hold to Sell with a price target lifted from $8 to $9.

Hostess Brands 

Hostess Brands reported first-quarter results last week with earnings per share that matched expectations and revenue that arrived better than expected. The Q1 report also signals any margin and profitability improvement over the next year is "less certain," Dickerson said in the downgrade note. Hostess' base business gross margins were 350 basis points lower in the quarter and EBITDA was down 4 percent, the analyst said. 

The margins and EBITDA numbers were negatively impacted by the following, Dickerson said:

  • Transportation cost inflation.
  • A negative innovation-led margin mix.
  • In-store bakery complications. 

It's unlikely these concerns will dissipate in the next six months, which implies ongoing pressure to the base business, the analyst said. 

Deutsche Bank's bullish case for Hostess Brands was partly based on the assumption the company would oversee acquisitions to its benefit, Dickerson said. Yet the in-store-bakery acquisition of Superior on Main and the Aryzta acqusition have both failed to show any transformational benefit, he said.

Hostess is showing a "reluctance" to pay for a growing snack business, so any incremental value from a near-term acquisition is low, the analyst said. 

Related Link: With CEO Retiring, Hostess Brands' Turnaround Won't Be A Cakewalk

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Dean Foods

Dean Foods' stock has gained 25 percent since its Q1 report, but the company continues to face four fundamental challenges, Dickerson said in the downgrade note:

  • Ongoing declines in dairy milk consumption at a time of excess product supply.
  • Increased pricing pressures that negatively impact an already low-margin business.
  • Increased share gains by even lower-margin private label businesses.
  • A low likelihood of a transformative acquisition given near-term free cash flow concerns.

Dean Foods' earnings report was in line with expectations but slightly ahead of consensus estimates, the analyst said. Coupled with a lack of any notable commentary to warrant a more positive view of the stock, a downgrade is justified given the ongoing concerns, Dickerson said. 

Deutsche Bank's higher price target of $9 is based on applying a 30-percent discount to the sector multiple on a two-year forward EPS basis. 

Price Action

Shares of Hostess Brands were trading lower by around 2.4 percent Monday morning while shares of Dean Foods were lower by 4.2 percent. 

Related Link:

Will Higher Milk Costs Weigh On Dean Foods Q1 Earnings?

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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsDairyDeutsche BankfoodFood InflationMilkRob DickersonTwinkies
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