3 Reasons Why Hostess Brands Could Be a Sweet Addition to Your Watchlist
TWNK stock has sound fundamentals and continues to grow market share
When I was first looking around for stocks to put on my watchlist, Hostess Brands (NYSE: TWNK) wasn’t one that came to mind. TWNK stock is up over 100% since the start of the pandemic. Most of that growth occurred in 2021. Since Hostess Brands does not pay a dividend, I presumed that the company might face some tough comps that would put a ceiling on stock price growth.
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However, the company’s stock is up 7% in 2022. That’s no small accomplishment with many stocks in the red. And Hostess just delivered an earnings report in which they beat on the top and bottom lines. But there’s more. Both numbers were higher from the same quarter the prior year.
This was the company’s ninth straight quarter of delivering revenue growth of at least 9%. And it accomplished that feat while maintaining its margins. My takeaway from this is that the company is, so far, able to pass along some of its rising costs to consumers.
Of course, this year more than most past performances will not be enough to excite investors. So here are three reasons why I believe TWNK stock should make your watchlist.
On Pace to Beat the Broader Market
In times of market volatility, it’s important to learn the lessons of history. And I’m not talking about the old saw that over time stocks go up. They have and it’s likely that they will again…someday. But since we don’t know when someday will be, what I mean by the lessons of history has to do with expectations.
The last few years have been incredible for market participants. For example, the S&P 500 Index was up 47% from the end of 2019 to the end of 2021. And Hostess Brands slightly outpaced the S&P 500. TWNK stock is up 50% in that same timeframe.
However, historically, if investors can get 10% stock price growth they consider that to be a good year. This is something to keep in mind as institutional investors are repricing the market.
So far in 2022, Hostess Brands is up 7% for the year. And the consensus estimate suggests that TWNK stock may have an upside of 16%. Citigroup (NYSE: C) was the latest analyst to boost its price target for Hostess Brands. If the stock were to hit Citigroup’s goal of $28 per share it would mark a 27% increase from current levels.
Not Terribly Overvalued
Over the last two years, it’s become fashionable for investors to say that “fundamentals don’t matter.” If the recent market activity is proving anything it’s that fundamentals will always matter. This is a problem for most stocks because by traditional metrics many stocks remain overvalued. And Hostess is no exception.
With a price-to-earnings (P/E) ratio of 24.30, Hostess Brands is slightly overvalued compared to the overall sector. However, investors can also see that the company’s price-to-book (P/B) ratio (approximately 1.77) is slightly below the sector average.
Increasing Market Share
Hostess Brands was a pandemic winner on the strength of at-home snacking. The company noted on its recent earnings call that this category continues to be elevated. And, 2021 brought a return of its convenience store business that showcases the company’s single-serve point-of-sale items. So it was good to see that in the first quarter of 2022, the company’s revenue and earnings are still growing.
And in the company’s Investor Day presentation in March it announced that it was continuing to add market share. One reason for this may be that the company has relatively less exposure to competition from private label brands.
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