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Hostess Brands Inc Class A TWNK

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Morningstar’s Analysis

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Narrow-Moat Hostess Achieves Impressive 2020 Results Despite COVID-19 Headwinds; Shares Compelling

Analyst Note

| Rebecca Scheuneman, CFA |

We are impressed with the resilience narrow-moat Hostess demonstrated in its fiscal 2020 results, despite ongoing traffic declines at convenience stores (c-stores), its largest channel, representing about 30% of company sales. Consolidated fiscal 2020 organic sales grew 4.6%, above our 3.0% estimate, and the 17.2% adjusted operating margin topped our 17.0% forecast. Management issued fiscal 2021 guidance for sales growth of 3.0%-4.5% and EBITDA of $255-$265 million, which brackets our estimates of 3.2% and $257 million, respectively. But earnings per share guidance of $0.80-$0.85 fell short of our $0.90 target due to a higher expected tax rate. Given the elimination of the B share class during 2020, and all related future noncontrolling interest payments, Hostess’ long-term tax rate increases to 27% from 21.5% previously. Better 2020 operating results should fully offset the higher tax rate, and we do not expect to materially alter our $17.60 fair value estimate. With shares trading at a 15% discount to our valuation, they offer an attractive risk/reward.

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Company Profile

Business Description

Hostess Brands is the second- largest U.S. provider of sweet baked goods under the Hostess, Voortman, and Dolly Madison group of brands, including Twinkies, Cupcakes, Ding Dongs, Ho Hos, Donettes, and Zingers. In 2018, Hostess expanded its breakfast offerings with the purchase of Aryzta's breakfast assets (the Cloverhill business), including a branded business and private-label deals, and in 2020 entered the cookie category via the Voortman tie-up. Although its roots stem from the 1919 launch of the Hostess Cupcake, the company filed for bankruptcy in 2012. Investors purchased the brands and restarted production in 2013, followed by a 2016 initial public offering. Most products are sold in the U.S., although third parties distribute some product to Mexico, the United Kingdom, and Canada.

7905 Quivira Road
Lenexa, KS, 66215
T +1 816 701-4600
Sector Consumer Defensive
Industry Packaged Foods
Most Recent Earnings Dec 31, 2020
Fiscal Year End Dec 31, 2020
Stock Type Slow Growth
Employees 3,000