Hostess Brands (TWNK): A Comprehensive Analysis of Its Fair Valuation
Hostess Brands Inc (NASDAQ:TWNK) has recently seen a daily gain of 21.73% and a 3-month gain of 3.93%, with an Earnings Per Share (EPS) (EPS) of 1.24. Is the stock fairly valued at these levels? This article aims to answer this question through a detailed analysis of the company's valuation. Let's delve deeper into the financials and operations of Hostess Brands Inc (NASDAQ:TWNK).
Company Overview
Hostess Brands Inc is a leading player in the North American sweet snacks market, manufacturing, marketing, selling, and distributing a variety of snack cakes, donuts, sweet rolls, breakfast pastries, cookies, snack pies, and related products. The company operates primarily in the United States and Canada, with third parties distributing some products to Mexico, the United Kingdom, and Canada. The company's stock price currently stands at $27, with a market cap of $3.60 billion. The GF Value, an estimation of fair value, is set at $24.55.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line on the summary page provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Hostess Brands (NASDAQ:TWNK) is estimated to be fairly valued based on the GuruFocus Value calculation. This suggests that the long-term return of its stock is likely to be close to the rate of its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Thus, reviewing a company's financial strength is crucial before deciding to buy shares. Hostess Brands has a cash-to-debt ratio of 0.1, ranking worse than 78.29% of 1769 companies in the Consumer Packaged Goods industry. Based on this, GuruFocus ranks Hostess Brands's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. Hostess Brands has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $1.40 billion and Earnings Per Share (EPS) of $1.24. Its operating margin is 16.91%, which ranks better than 88% of 1817 companies in the Consumer Packaged Goods industry. Overall, the profitability of Hostess Brands is ranked 7 out of 10, indicating fair profitability.
Growth is one of the most important factors in the valuation of a company. Hostess Brands's 3-year average revenue growth rate is better than 50.26% of 1713 companies in the Consumer Packaged Goods industry. Hostess Brands's 3-year average EBITDA growth rate is 28.3%, which ranks better than 78.35% of 1524 companies in the Consumer Packaged Goods industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate a company's profitability. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Hostess Brands's ROIC was 5.62 while its WACC came in at 5.71.
Conclusion
In conclusion, the stock of Hostess Brands (NASDAQ:TWNK) is estimated to be fairly valued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 78.35% of 1524 companies in the Consumer Packaged Goods industry. To learn more about Hostess Brands stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
