Hostess' Sweet Comeback Runs Into Industry Slowdown

Hostess Brands, Inc. TWNK, hoping to rediscover the world’s sweet tooth and rekindle a fondness for Twinkies in a more nutrition-conscious era, got a Neutral rating from a UBS analyst on Monday.

Analyst Steven Strycula set a $16 price target for the snack makers in initiating coverage. The company, which was founded in 1919, has traded hands twice since emerging from bankruptcy protection four years ago and is now owned by a publicly traded affiliate of the Gores Group, an investment company.

Hostess was trading at $15.08 on Monday, down 0.72 percent.

Confectioner Likely To Beat Market Sector

“Our Neutral rating appreciates Hostess' ability to return market share to pre-bankruptcy levels of 23% (from 17% today), but decelerating industry trends and elevated Street EPS ests leave a balanced risk/reward as incremental share gains become more difficult,” Strycula wrote.

Related Link: Hostess Looking Like A Sweet Deal At Current Valuation

“Over the next few years Hostess should outgrow baked snack competitors given further distribution runway in (convenience) store/grocery channels and new category platforms (cookies, brownies). But unfortunately, industry sales have slowed to -1% YTD, giving us reasons to believe Street FY18-19 sales ests are too high at +5.8%.”

“Our portfolio analysis shows Hostess has contributed more than 100% of the Sweet Baked Good category growth since returning to shelves in 2013 (Hostess +7% CAGR, Category -1%). Recent sales outperformance is fully attributable to retail distribution gains since returning to shelves in 2013.”

He said Hostess’ future growth will depend more heavily on innovation and unproven categories such as cookies, brownies and in-store baking.