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

The retirement of Hostess Brands, Inc. TWNK CEO Bob Toler isn’t bittersweet. It’s just bitter, according to UBS.

“We view Toler as the driving force behind Hostess' turnaround success and view his departure (plus recent COO departure) as concerns,” analyst Steven Strycula wrote in a Friday note.

UBS downgraded the stock to Sell and lowered its price target from $16 to $11, representing 18-percent downside.

What Toler Spits Out

As announced Thursday, Toler will depart as late as March 1, 2018, leaving a company confronting slowing category trends, rising competition and market share concession in sweet baked goods, a category accounting for 93 percent of profits.

“Long-term, we view Hostess' core Sweet Baked Goods segment as a category particularly vulnerable to decreased retail space allocation, and one less relevant online due to its impulse nature,” Strycula wrote.

Still, bulls are confident Hostess can expand its market share from 18 percent to 23 percent, and while Hostess’s incomparable first-quarter growth suggests the possibility of continued sales outperformance, UBS has doubts. Strycula is concerned by a second-quarter stall in gains and third-quarter share loss to Little Debbie and Entenmann’s.

Burning The Bottom Line

The analyst expects a marginal miss in 2017 sales — $775 million against $781 million guidance — with a slight pickup in 2018 to $799 million. He also cut the company’s 2017 earnings per share estimate from 59 cents to 57 cents and 2018 EPS from 67 cents to 61 cents.

Notably, UBS is the only firm with a Sell on the stock. Two analysts recently initiated coverage with Holds, while six others initiated or reiterated Buys. Price targets range from $14 to $20, according to TipRanks.

At time of publication, Hostess was set to open down 10 percent off its Thursday closing value of $13.43.

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