Why Hostess Brands Stock Suddenly Skyrocketed on Friday

What happened

After Hostess Brands (TWNK 21.64%) went bankrupt in 2012, Apollo Global Management and Metropoulos were able to buy its snack cake division — which includes Twinkies and Ding Dongs — for $410 million. There were no other bidders at the time. But now a decade later, appetite for these tasty assets may have improved.

Hostess Brands stock suddenly skyrocketed at around 2:30 p.m. ET on Friday, after Reuters reported that the company was exploring a sale. As of 3 p.m. ET, Hostess Brands stock was up 26% and getting close to an all-time high.

So what

On one hand, investors could say that Hostess Brands’ business is healthy. The company’s net revenue was up almost 4% year over year in the first half of 2023, and management is guiding for comparable growth for the entire year. Profits are also up.

On the other hand, Hostess Brands isn’t selling as much volume (the number of items) this year. For example, in the second quarter of 2022, volume was down almost 7%. But the company still grew revenue by raising prices. And investors worry it’s too much, and consumer demand is now falling.

The report from Reuters says this could be why management is exploring a sale.

Now what

Multiple companies were named as potential suiters for Hostess Brands. But it’s important to keep in mind that neither Hostess nor the potential acquiring companies have confirmed this takeover rumor, as of this writing. It might be nothing in the end.

Moreover, I’m not sure how much more Hostess Brands is worth in a takeover. Yes, Twinkies are iconic (if I do say so myself) and that counts for something. But the stock already trades at 22 times trailing earnings, which isn’t exactly a bargain for a bakery business.

In conclusion, Hostess Brands could have long-term upside as a stand-alone company. But as a takeover, I think the stock’s potential upside is limited at its current price.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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