ATLANTA — SunTrust Robinson Humphrey has raised its rating on Hostess Brands, Inc. to “buy” from “hold,” reflecting the research firm’s belief that the Kansas City-based company’s shares are a strong fit as consumers begin to travel and potentially snack more. Meanwhile, SunTrust raised its price target for Hostess to $16, up from $12.
“In our opinion, the shares are a unique way to play both the reopening of America and the ‘Summer Road Trip 2020’ trend over the next few months,” Bill Chappell, an analyst with SunTrust, wrote in a June 2 research note. “Longer term, we believe the company’s streamlining efforts over the past year and recent acquisition will enable it to post consistent organic growth over the next few years. As these near- and long-term factors play out, we expect the stock’s multiple to move higher and closer to its packaged food peers.”
Mr. Chappell said SunTrust expects Hostess to ride the reopening of America. Although Hostess experienced an initial spike in sales in March in connection with pantry loading associated with the coronavirus (COVID-19) outbreak, the company’s sales slowed in April. Hostess generates a lot of sales through convenience stores and has a strong presence in office vending machines and school lunch boxes. With many of those outlets shut off, sales struggled. Now, with shelter-at-home rules being relaxed, a rebound is expected, Mr. Chappell said.
“While we understand that these channels will not be back to normal for months we believe 1) the worst is clearly behind (Hostess) in terms of lost sales and 2) the stock can be firmly put in the bucket of ‘reopening stocks’ that will see trends improve sequentially as the country reopens,” he said.
Mr. Chappell said SunTrust expects Americans to take some form of family vacations this summer, most likely to destinations to which they can drive. This trend would be a boon for Hostess, he said.
“In our opinion, (Hostess) will be a direct beneficiary of the spike in 2020 road trips, whether it is through packing snacks for the long drive, or increased visits to c-stores/gas stations on the road,” he said. “Again, the impacted channels sell higher margin single-serve products so it could have an even bigger boost to profits than sales over the next few months.”
Mr. Chappell also said SunTrust has seen strength in the leadership of Andrew Callahan. Since Mr. Callahan joined the company in 2018 Hostess has shifted the focus to the company’s extremely strong commercial capabilities. He has found ways to increase sales in the club and non-FDM channels and helped the company better leverage its pallet capabilities.
“Hostess can put together a promotional pallet of products (i.e. Halloween, 4th of July) and ship it to 4,000 Walmart doors in 24 hours,” he explained. “These pallets keep the product offering ‘fresh’ and are placed in the high traffic lanes of grocery or mass retailers. We view this as a distinct competitive advantage for the company, one that will enable it to maintain consistent growth well after the aforementioned benefits of the reopening of the country are over.”