“Know what you own, and know why you own it. — Peter Lynch
At times I crave a sweet snack during the day, and enjoying Twinkies brings back memories. Twinkies were first sold in 1930 and are just one of the iconic varieties at Hostess Brands, Inc. (TWNK). TWNK is a packaged good company that develops, manufactures, sells and distributes fresh baked sweet goods. Other key varieties include Hostess CupCake, Ding Dongs, Ho Hos, Donettes, and Fruit Pies.
The snack market is growing, expected to rise to $180 billion in 2022, up from $150 billion in 2019. When snacking, a sweet snack is the top choice for consumers, according to an industry survey. TWNK notes 74 percent of consumers favor a sweet snack, followed by 69 percent choosing a better-for-you snack, and 68 percent preferring a late-night snack. TWNK continues to grow market share within sweet baked goods, from 18.5 percent in 2019 to 19.4 percent in 2020.
Growing market share helped propel substantial growth in the recent quarter. Third-quarter revenue rose 18.5 percent year-over-year to $261 million, as shown below, and adjusted EBITDA of $60 million was up 29 percent. Net income of $240 million, or $0.18 per share, rose from $0.07 in the prior period.
The recent acquisition of Voortman Cookies Limited also contributed to the growth in the quarter. TWNK closed the acquisition of the maker of wafers and specialty cookies on January 3, 2020. The deal both diversifies TWNK’s product portfolio and plays to TWNK’s strength in the sweet snack market.
With solid year-to-date results, TWNK raised its guidance for the full year of 2020 to the upper end of the prior range. Adjusted EPS is now expected to be between $0.73 and $0.75, up from the previous outlook of $0.70 to $0.75. Not only is it a positive sign the company has provided 2020 guidance, given many companies are no longer issuing guidance in the current environment, but tightening the range to the upper end of the guidance projects further confidence in TWNK’s future.
Cash flow has been buoyed by higher income with year-to-date operating cash flow of $108 million. TWNK also absorbed the acquisition this year without a material change in its 0.72 debt to equity ratio. In early November, TWNK also announced a $100 million stock repurchase program, which will support the stock price.
Despite improving fundamentals, TWNK stock remains slightly down since the year’s start, as shown below. The company does not currently pay a dividend and trades at a forward PE ratio of 18.
Risks to ownership
- Consumer preferences can change, and TWNK risks consumers prefer healthy or savory snacks instead of their sweet snacks.
- Snacking is often a discretionary purchase, and weak economic conditions can negatively impact discretionary purchases, but demand has remained robust this year.
With the Voortman acquisition and a growing market (and share), TWNK is poised to continue reporting expanding revenues and profits. Yet the growth is not yet reflected in their stock, and I’d use this as an opportunity to buy TWNK.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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