Food & Drinks

J.P. Morgan sees strong upside for Hostess


NEW YORK — Calling Hostess Brands, Inc. “one of the most under-appreciated stories in our coverage universe,” research analyst J.P. Morgan has added the Kansas City-based maker of Twinkies and Ho-Hos to its J.P. Morgan Analyst Focus List as a “growth idea” after hosting a series of meetings with top executives on Dec. 8.

In a Dec. 9 research report, J.P. Morgan analyst Kenneth Goldman identified several factors that have Hostess poised to be one of the fastest-growing companies in the firm’s coverage over the next two years.

First, in October, C. Dean Metropoulos, chairman of Hostess, notified the company of his intent to resign from the board of directors at the end of the year to pursue other opportunities. Mr. Metropoulos has slowly sold off stock in Hostess over the past few years, and with his departure Mr. Goldman said the main impediment to investor buying is likely out of the way.

A second key factor is the acquisition of Voortman Cookies Ltd. from private equity firm Swander Pace Capital in a transaction valued at approximately $320 million in cash. Hostess has been hard at work integrating Voortman’s since the acquisition was finalized in January, and in recent months has transitioned Voortman’s direct-store delivery distribution model to the Hostess warehouse model in both the United States and Canada.

Mr. Goldman said J.P. Morgan also anticipates better sales to non-measured channels. Specifically, he mentioned Hostess’ efforts to expand its presence in the convenience store channel, details of which were first presented during the company’s 2019 Investor Day.

“We found the strategy convincing, and now, with a year’s results behind us, it seems to be working better than expected,” Mr. Goldman said. “Hostess has grown its c-store share by hundreds of basis points recently (per the company). This is important because c-stores have been hurt by COVID-19’s impact on eating habits. So as c-stores improve in 2021 (as we expect), Hostess’ improved share could lead to a sales recovery within this channel that is stronger than what the company felt on the downside (because it will have a greater piece of the recovery’s pie).”

The final driver involves improved performance of new products. Mr. Goldman said J.P. Morgan expects Hostess’ contribution from new products to be greater in 2021 than in 2020. The company also has raised the possibility of “reimagining” the front end of grocery stores in a way that is simpler and beneficial to Hostess’ displays.

J.P. Morgan has raised its 2021 price target on Hostess to $19 per share, up from its earlier estimate of $17. The research firm also lifted its 2021 earnings-per-share estimate to 85¢ from 84¢.

“Importantly, we are modeling only 5% to 6% EBITDA growth each of the next two years, which could prove conservative if top-line growth remains as strong as it has been,” Mr. Goldman noted in the report.

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