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.