EUR 850.00 For Business Accounts Only

Morningstar | Despite Near-Term Profit Pressure From an Acquisition, Hostess’ Prospects Are Solid; Shares Cheap

While its lineup cuts against trends toward healthier eating, we believe Hostess should benefit from its brand portfolio even after it rebuilds distribution following its 2012 bankruptcy-induced hiatus. Although Americans profess a preference for better-for-you items as snacking frequency rises, the desire for sweet, indulgent fare remains. With well-established brands that demonstrate pricing power, we believe Hostess should outperform its rivals.The company has significant opportunities to recover sales lost during its hiatus, build distribution in new channels, and capture attention through innovation. The firm’s warehouse distribution architecture has allowed it to build a strong presence in dollar stores and a larger profile in drug stores, and we believe Hostess should be able to leverage its brands in service of new freezer case and in-store bakery offerings. Furthermore, the company has long garnered prices well above offerings from category leader Little Debbie (owned by McKee Foods) and private-label alternatives. In addition to signaling customer demand, the premiums suggest Hostess’ labels are more valuable to retailers, offering a chance to earn a higher penny profit relative to other category players.As Hostess rounds out distribution, we anticipate management will seek acquisitions to leverage the firm’s infrastructure and brand equity (as it did with its 2016 purchase of in-store bakery item manufacturer Superior and its breakfast deal in 2018). Leadership’s operational record is strong, and deals could build on Hostess’ strengths in adjacent categories (such as cookies and frozen desserts).Category dynamics are challenging, with competition rising in the center of the grocery store as retailers respond to demand for fresh products as well as specialty offerings (such as natural, organic, and clean-label items). While we believe the progress Hostess has made in eliminating the inefficiency inherent in its legacy business model (by increasing automation, centralizing production, and moving to warehouse distribution) will free resources for brand-building investment, category headwinds lead us to conclude that its competitive standing is weakening.