Milling & Baking News - June 5, 2018 - 10


Vertical Group begins coverage of
Hostess Brands with 'buy' rating
NEW YORK - Vertical Group on
May 21 initiated coverage of Kansas
City-based Hostess Brands, Inc. with a
"buy" rating and a $19 price target (versus a May 21 closing price of $12.85).
"Hostess has transformed itself from
the days of old and today is a growing,
high margin business capable of future M.&A. into adjacent snack product areas," Brett Hundley, research
analyst, wrote in a May 21 report.
"We really like this company's culture
of winning, its focus on innovation
and white space development, and
its management of the consumer and
the investment community. Although
we see potential for competitors to
become more focused, themselves, going forward, we like (Hostess Brands')
positioning and its ability to act with
purpose on forward M.&A."
In initiating coverage of Hostess
Brands, Vertical Group identified a
few key points behind the move. First,
the company's transformation, which
Mr. Hundley noted has been a result
of new management that has taken
the company from "an extremely inefficient baked goods operator with
O.I. (operating income) margins in the
(low-single digits) and transformed it
into a highly efficient operator with
O.I. margins in the 20% to 25% range."
"The company acts and reacts
quickly, managing the consumer and
investor community very well," Mr.
Hundley said. "We think it is deserving of a far better valuation multiple
than that received today."
A second key factor has been the

company's growth strategy. Mr.
Hundley said Hostess Brands' management is focused on building upon
the strength of the Hostess brand
and should be able to deliver strong
growth. The company also seems
poised to leverage its
solid cash flow and
penchant for turning
around businesses as it
looks to conduct valueenhancing M.&A. into
adjacent snacking and
baked foods areas in the Hundley
years ahead, he said.
Vertical Group estimated earnings
per share of 68c and 85c in fiscal 2018
and fiscal 2019, respectively, which
the ratings agency said may prove
"We admire (Hostess Brands') turnaround, along with its focus on category/brand building through innovation
and marketing, along with its pursuit
of white space distribution/opportunity," Mr. Hundley wrote. "Simply,
this is a company of action, relative to
its peer set that has been, well, rather
lethargic, to date. We expect the company to continue to outpace sweet
baked goods category growth ahead,
despite the potential for a better
competitive stance from peers, along
with the continued pursuit of health
and wellness by consumers. In addition, we think that (Hostess Brands)
will be active on the M.&A. front,
and we think that the latter can unlock hidden value in underperforming assets currently owned by other

PepsiCo to acquire maker of
baked fruit and vegetable snacks
PURCHASE, N.Y. - PepsiCo, Inc. has been committed to Performance
has agreed to acquire Bare Foods Co. with Purpose, our vision of making
d.b.a. Bare Snacks, a maker of baked more nutritious products, while also
fruit and vegetable snacks. Financial reducing added sugars, salt and saturated fat," said Indra Nooyi,
terms of the transaction were
chairman and chief execunot disclosed.
tive officer of PepsiCo. "Bare
Founded in 2001, San FranSnacks fits perfectly within
cisco-based Bare Snacks ofthat vision. The Bare Snacks
fers a portfolio of apple chips,
leadership team has done an
banana chips, coconut chips
outstanding job building a
and recently added beet chips,
top-tier organization and
carrot chips and sweet potato
a strong brand with auchips. The addition of Bare BARE FOODS CO.
thentic roots, and I couldn't
Snacks expands PepsiCo's nutritious
be more excited to welcome Bare
snacking options.
"For nearly a dozen years, PepsiCo Snacks to the PepsiCo family."
10 / June 5, 2018

Milling & Baking News

managers/entities. Some now refer to
such an impact as the 'Hostess effect.'"
Despite the optimistic outlook for
Hostess Brands, Mr. Hundley did
point to several risks that could affect the company's ability to deliver
on the stated price target. Risk factors
he cited include a rising raw material environment, consumer pursuit
of healthier food/nutrition labeling,
policy change/product tax, improved
competition, product recall/health
scare, greater retail price pressure,
ownership structure change and facility concentration.
Another potential risk factor that
may be lurking is a lack of success in
the in-store bakery category.
"A stated strategy of Hostess is to
consolidate and expand within the instore bakery area of retail grocery," Mr.
Hundley said. "This part of the store
has been growing faster than centerof-store areas, in part due to perceptions over quality and health. (Hostess
Brands) has already made one asset
purchase in the space (Superior Cake
Products), and we believe that it will
look to complete other deals going forward, as well. We believe that the I.S.B.
category is a much different production/sales process, relative to the company's core branded cake business. In
fact, we believe that I.S.B. very much
mirrors that of a private label platform; traditionally, the management
of private label and brands together
has not worked well for companies.
We worry about the allocation of capital and other resources to an I.S.B. area
that may not offer sufficient returns
(margins/R.O.I.C.), along with s.k.u./
customer proliferation that could further weigh on segment results." MBN
Bare Snacks will continue to operate independently at its headquarters
with its leadership reporting into PepsiCo's Frito-Lay North America division upon closing of the transaction,
according to the companies.
"Bare premium baked fruit and vegetable chips are an exciting expansion
of Frito-Lay's better-for-you snack offerings," said Vivek Sankaran, president and chief operating officer for
Frito-Lay North America. "While we
will continue to offer the current Bare
Snacks product line, we look forward
to working with the Bare Snacks team
to deliver new, innovative options,
and ultimately expanded distribution,
to meet the ever-growing consumer
demands for authentic and nutritious
snacks." MBN /

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