On Tuesday, Hostess Brands, Inc. (NASDAQ:TWNK) holds what might be considered its first ‘real’ earnings release. The company did release third-quarter results back in November, but in a quiet press release, with no conference call. On Tuesday, however, investors will get the first clean look at the new Hostess Brands, complete with post-earnings commentary. And that should be a good thing for TWNK stock.
To be sure, shares have gone on a torrid run, after the merger with Gores Holdings. But there should be more upside.
TWNK stock’s valuation is higher than it was a couple of months ago, but it still trades at a discount to its snack food peers. Furthermore, Hostess Brands’ growth figures in Q3 were very impressive, and there’s little reason to see a deceleration, at least not yet.
It’s true that TWNK went bankrupt twice in the last twelve years. But this is a different Hostess Brands, and a different TWNK stock. The more investors that hear the Hostess Brands earnings story, the better TWNK stock will perform.
A Lot of Optimism Toward TWNK Stock
Hostess stock has gone pretty much straight up before and after its merger with Gores Holdings. In fact, TWNK is up nearly 23% in 2017 alone, and it has almost doubled since July.
Even in a bull market, that’s a huge amount of appreciation. But there’s a major reason the performance has been rather impressive. In Q3, for instance, Adjusted EBITDA increased 37% year-over-year, on an impressive 24% increase in revenue. Deep Fried Twinkies — sold only at Wal-Mart Stores Inc (NYSE:WMT) — have been a huge hit and Twinkies ice cream — a partnership with Nestle SA (ADR) (OTCMKTS:NSRGY) — could drive upside to 2017 results.
Purely from a near-term trading perspective, it’s difficult to see TWNK stock getting tripped up by the Q4 results. Performance has been good for several quarters, and seems unlikely to reverse. Expectations likely aren’t that high, particularly with a dearth of Wall Street sell-side coverage. In fact, there’s a decent level of short interest in the stock — about 6.5% — that could provide a bit of a “short squeeze” if investors like the report.
So while there is a long-term argument that Hostess Brands stock will be pressured, the Q4 report hardly seems like a downside catalyst.
Hostess Brands: Cheaper and Growing Faster Than Its Peers
The two knee-jerk reactions toward TWNK stock from a bearish standpoint are rather simple to understand. First, the company has gone bankrupt twice in twelve years. Secondly, Twinkies, Ho Ho’s and other “junk food” hardly seem like a growth market in an environment where consumers are paying closer attention to what they (and their children) eat.
As far as the first argument goes, Hostess stock has gone to zero — twice. But the third time may be the charm. The company has completely changed its cost structure, most notably by exiting union contracts through the bankruptcy process.
Not only has the cost structure changed, but it’s one of the best in the food business. TWNK’s EBITDA margins of ~29% over the last four quarters are well above majors like Hershey Co (NYSE:HSY) and Mondelez International Inc (NASDAQ:MDLZ). In fact, they are nearly twice those of J & J Snack Foods Corp (NASDAQ:JJSF).
Yet TWNK trades at a discount to all of those stocks, all of which have the same “junk food”-type product lines. JJSF, in particular, is roughly the same size, though the maker of SuperPretzels and Icee slushies has smaller exposure to the grocery store sector. Yet JJSF — growing revenue ~1% against TWNK’s double-digit figures — trades at 15x EBITDA, a substantial premium to Hostess stock.
All told, it seems like the optimism toward TWNK stock still hasn’t caught up to the valuation.
Is the Q4 Earnings Report the Catalyst for TWNK?
Hostess stock should have more room to run — the question is whether the Q4 report will help on that front. There’s reason to believe it will. The first conference call will allow management to more vocally, and more broadly, give its side of the story. The Q3 results weren’t widely disseminated, given a mid-day, unannounced release; Tuesday’s results, in contrast, come after hours and on a quiet day for earnings.
Investors will be much more likely to know what happened in Hostess Brands’ Q4 than they did in its Q3. And assuming TWNK can keep its momentum going, that seems likely to be a good thing for the stock.
Heading into the Q4 report, Hostess Brands looks good both as an investment and as a trade. In the near-term, short interest and the “newness” of the TWNK stock story seem likely to drive post-earnings gains. Longer-term, there’s still room for the story to play out and Hostess stock to run.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securties, but may take a long position in TWNK ahead of earnings.