TWNK has upside

"Hostess is one of the largest packaged food companies focused on developing, manufacturing, marketing, selling and distributing fresh baked sweet goods in the United States. The brand’s history dates back to 1919, when the Hostess CupCake was introduced to the public, followed by Twinkies® in 1930. Today, Hostess produces a variety of new and classic treats including Ding Dongs®, Ho Hos®, Donettes® and Fruit Pies, in addition to Twinkies® and CupCakes."

Hostess released their quarterly and annual results on March 14, 2017.  Pro-forma Full Year 2016 Net Revenues increased by 17.2% to $728 million.  The company has guided to $781 million of revenues for 2017, and adjusted EBITDA of $235 million.  The company has net debt of $972 million. 

A few key points:

1) Hostess has introduced new products, which has driven growth to the tune of 15%.  Organic growth is a good thing, and suggests they are gaining traction with consumers.  They introduced Suzy Q's and Hostess Sweet Shop Brownies. 
2) Acquisition suggests management has an eye towards generating shareholder value through smart acquisitions. Superior Cake products is an example, albeit gross margins are a little lower than the sweet baked goods segment at 30%.
3) Guidance suggests that gross margins will come in at 45% suggesting a premium product that consumers are willing to pay a little extra for due to the brand.  EBITDA margins of 30% are very healthy.  Combined with low debt costs of 5% (based on proforma interest payments), there is a very good chance Hostess will be able to pay down debt, thereby accruing value to equity holders. 
4) The stable margin and high free cash flow generation of the business is conducive to leverage.  While the multiple is not dirt cheap (EV of 3.1b over EBITDA of $235 million, implying 13X), there is a good chance management will be able to compound shareholder value here.
5) Hostess could become an acquisition target for a larger packaged food company looking to acquire a solid brand with durable margins and growth potential. 
6) The business is not CAPEX intensive and operating expenses (including marketing) are reasonable.

Negatives:

1) Healthy living is in, while fatty foods are out.  I think this will likely put a cap on Hostess' ability to grow the business, but it is small and nimble enough right now for this not to weigh heavily on their ability to generate profitable growth. 

Hertz at $1.45b market cap: Rental Car Business Model has upside

The issue here is gas prices. Low gas prices have reduced demand for compact and mid-size cars, which has resulted in a sharp decline in used car values. But apart from the initial hit, Hertz should be able to purchase these cars at a lower price going forward, so the hit might be a one time item.

Hertz can recover from here and the upside might be substantial. The business model is a solid one for four reasons:

a) Interest expenses are low due to fleet debt being securitized by vehicles
b) Higher depreciation expenses typically result in high car rental rates (pass through to customer)
c) Supply is rational due to there being only two big players in the market
d) Fleet can be scaled up and down and mix can be changed to influence rental rates thereby improving Adjusted Corp. EBITDA even at lower revenue levels

e) 70-75% of operating costs are variable, which means that "time" can get Hertz through difficult time

At the current price, the Enterprise Value is less than $4.55 billion. LTM Adj. Corp. EBITDA was $553 million, which puts Hertz trading at less than 8X, under pretty poor conditions. Of course the leverage here is very high and there are debt covenants, so a zero is not out of the question. But given the business model and current condition of banks / travel, bankruptcy is not on the cards, although we may see a few covenant breaches if used car prices continue to plummet.

Sunrun isn't a great business, but it might have a good run if residential solar sales accelerate...

First a business description:

"Sunrun Inc. (Sunrun) is engaged in the design, development, installation, sale, ownership and maintenance of residential solar energy systems (Projects) in the United States. The Company is engaged in providing solar energy services and products to its customers. Sunrun has over 111,000 customers across 15 states, as well as the District of Columbia. Sunrun sells directly to consumers over the phone, Web and retail stores, as well as through a network of certified partners. It offers various plans and services, such as Pay as you go and Purchase your system. Its Pay as you go offers plans, such as BrightSave Monthly and BrightSave Prepaid. Sunrun's BrightSave Monthly plan comes with both product and workmanship warranty, as well as protection against future utility rate hikes. Users can lock in over 20 years of electricity with Sunrun's BrightSave Prepaid solar lease plan. With Sunrun's BrightBuy, users can purchase the entire solar system."

There are a couple of issues with this business model. First this is a debt financed business, and inevitably during a solar downturn, these guys will go bust.

They have $640MM of non-recourse debt, and $244MM of recourse debt.

Their recourse debt has interest of 4% to 5.75%. While this may not seem high, they are at the mercy of their bankers to keep them solvent. If the banks pull the plug on funding, this business has no ability to payback debt and will go insolvent like SunEdison.

The non-recourse debt includes term loans from banks and securitized solar asset backed notes. The interest on these is better, but again Sunrun relies on banks for their funding.

Their total debt is $900MM, which is not an insignificant amount.

Now granted they claim they have $1 billion of net earning assets. By a crude measure, they should be trading at $1 billion EV. If you take their current market cap of $524MM PLUS $244MM of recourse debt MINUS unrestricted cash of $206MM PLUS Minority Interests of $389MM, gives you EV of $951MM. So the market has it about right at the current price.

What I would say is that this is not a good business. They have no moat and using fickle third party funding sources to finance a highly cyclical commoditized business is NOT recipe for success. I wouldn't get too excited here, but there is obviously scope for them to "make hay while the sun shines."

Treat the stock as such .