"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.
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.
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