Business Market Updates

Hostess Brands’ (TWNK) Price Target Raised to $15 as Morgan Stanley Sees Earnings Growth From Voortman Cookies Deal

Hostess Brands (TWNK) received an increase in its price target at Morgan Stanley, which expects the sweets maker’s purchase of Voortman Cookies to lead to earnings growth.

The price target was raised to $15 from $14, with the move coming after Hostess on Monday said it plans to acquire Voortman Cookies from Swander Pace Capital for about $320 million in cash. Shares of Hostess were little changed during Tuesday’s session. They rose nearly 3% on Monday when the deal was announced.

“Overall, we believe the transaction has potential to offer an attractive return profile given opportunities for topline growth and cost synergies,” said Morgan Stanley in a note Tuesday. It said the increased price target reflects its pro-forma 2021 earnings before interest, tax, depreciation and amortization estimate of $250 million following the deal. The deal is expected to close in early January.

Hostess said the deal gives it an entrance into the “attractive” wafer and sugar-free cookie categories as well as the so-called better-for-you snacking market. Morgan Stanley said Hostess should be able to increase Voortman’s topline growth by expanding its distribution to convenience and dollar stores “as well as further penetrating existing distribution channels where Voortman’s distribution reach is below” that of Hostess, said analysts Pamela Kaufman and Christine Yang in the note.

The firm said Hostess’ accretion assumptions stem from the company’s projection of substantial cost savings of $15 million, or 17% of Voortman sales, materializing within 12 to 18 months after the deal closes. Morgan Stanley expects the savings to come from a transition to Hostess’ warehouse distribution model from Voortman’s independent distributor model.

Morgan Stanley said it sees execution risk as Hostess’ ability to hit its “optimistic” synergy goals depends on a seamless transition towards Hostess’ distribution model.

“For perspective, when TWNK moved away from direct-store delivery to a warehouse distribution model, as it emerged from bankruptcy protection, its distribution expenses fell from 34% to 16% of revenue,” said the firm. “While TWNK has successfully executed on such a transition in the past, there is nevertheless execution risk inherent in such a move.”

Morgan Stanley said it sees the deal as “modestly” accretive to per-share earnings in 2020, by nearly 4%, then accretion reaching about 8% in 2021 and 9% in 2022.

About the author

Daniel Serrano

Daniel Serrano

Daniel Serrano had acquired considerable experience in writing and editing publications before recruited by Expert Recorder news portal as Editorial Manager. His key task is to conduct effective business reviews based on the most recent business strategies. Due to his stronghold and understanding over finance, marketing, business, and trade-related topics, he is known as a business counselor among the staff. His expertise in business-related topics is quite impressive. His business-related concepts are on fingertips, which aids in illustrating the business-related articles in brief and defined way, clear to even an amateur. He pursued his post-graduation in Finance from a UK-based university.