How 'Bout Those Twinkies?
Good news: We found the cream filling.
While investors were busy gawking at Snapchat's over-hyped IPO, Hostess Brands Inc. -- a piece of Americana that cheated death -- has turned into one of the best-performing new listings of the past year.
The revamped, tastier Twinkie maker rejoined the U.S. stock market Nov. 7 and has returned almost 40 percent, giving it a market value of $2.1 billion. Over that span, the Bloomberg Initial Public Offering Index and the S&P 500 rose just 13 percent and 14 percent, respectively. (Meanwhile, those who bought Snapchat owner Snap Inc. in its trading debut earlier this month are already under water.)
Don't recall the Hostess IPO? That's because technically there wasn't one. Its owners Apollo Global Management and Metropoulos & Co. -- which acquired the old Hostess during its 2013 liquidation -- opted to sell the business four months ago to a special-purpose acquisition company, or SPAC, sponsored by Gores Group, another private equity shop. SPACs became popular alternatives for entering the public market during what had been a pretty pulseless IPO market (that was until Snap came along). Apollo, Metropoulos and Gores together own 50 percent of the new, publicly traded Hostess, and C. Dean Metropoulos is chairman.
Getting the iconic golden sponge cakes back on shelves is an incredible story, which was detailed by the New York Times in December. It revealed how the life-saving buyout enriched Hostess's owners while thousands of workers lost their jobs, a criticism of private equity-led turnarounds. The firms paid $186 million for Hostess's snack-cake business, which also includes Ding Dongs and Ho Hos, and ended up with an investment worth 13 times that, according to the Times. Meanwhile, a nearly century-old company that had more than 18,000 employees before its bankruptcy was whittled down to 1,350 as of December... but the company is alive.
The controversy aside, Hostess's comeback is impressive from an investment standpoint -- and it still has runway ahead of it. For that reason it stands out among U.S. packaged-food manufacturers, which are starved for growth. If you put any stock into analysts' recommendations, Hostess is one of only a handful of companies in the industry that has all buy ratings. And the slimmer, more efficient model is producing some of the industry's best margins. What used to take 38 employees to operate a Twinkie-making line now requires just 10.
Hostess generated $728 million of sales in 2016, a figure that's projected to climb about 8 percent this year and 6 percent next. It is still highly indebted, with just $215 million of adjusted Ebitda against $993 million of long-term debt and capital lease obligations. But with the cash the business throws off -- $116 million last year -- the leverage ratio should come down. Michael Gallo of CL King & Associates sees the ratio falling to 3 by the end of 2018. That would put it in line with the industry average and on stable footing to continue making acquisitions in the fragmented baking-products space. 1
As it searches for takeover candidates, Hostess is also finding ways to expand its presence to other areas of the grocery store, such as within Wal-Mart Stores Inc., which represents more than 20 percent of net revenue. It introduced deep-fried Twinkies to the freezer aisles last year and is planning other concoctions.
An obvious challenge is that consumer tastes have generally shifted toward ostensibly healthier options. But sweets aren't going away, and Hostess has an opportunity to be one of the leaders there -- while also looking at ways to address the health-conscious. It did convert its Mini Muffins into whole grain, which management says is producing double-digit growth, versus declines previously.
A few years ago, Hostess was on the brink of collapse. Now, Twinkie the Kid rides again.
Hostess also got to start with a clean slate in its second life -- no legacy pension obligations, debt was wiped out, etc. -- save for the borrowings used by Apollo and Metropoulos to acquire the business.
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