Hostess Brands Inc (TWNK, Financial) has recently seen a daily gain of 18.8% and a 3-month gain of 27.27%. With an Earnings Per Share (EPS) (EPS) of 1.24, the question arises: is the stock significantly overvalued? In this article, we delve into an in-depth valuation analysis to answer this question. Read on to understand the intricacies of Hostess Brands' valuation and make an informed investment decision.
Company Overview
Hostess Brands Inc is a leading sweet snacks company operating mainly in North America. The company specializes in developing, manufacturing, marketing, selling, and distributing a wide range of snack cakes, donuts, sweet rolls, breakfast pastries, cookies, snack pies, and related products. The majority of its operations are in the United States, with some products distributed to Mexico, the United Kingdom, and Canada by third parties. With a current stock price of $33.4, it's important to compare this value to the GF Value, an estimation of its fair value. This comparison will pave the way for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line gives an overview of the fair value that the stock should ideally be traded at. 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.
For Hostess Brands (TWNK, Financial), the stock is believed to be significantly overvalued according to GuruFocus' valuation method. With a market cap of $4.40 billion, the stock's current price of $33.4 per share is significantly above the GF Value Line. This indicates that the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully review a company's financial strength before deciding whether to buy shares. Hostess Brands has a cash-to-debt ratio of 0.1, which ranks worse than 78.03% of 1793 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 generally 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 88.67% of 1810 companies in the Consumer Packaged Goods industry. Overall, the profitability of Hostess Brands is ranked 7 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Hostess Brands is 6.4%, which ranks better than 50.35% of 1714 companies in the Consumer Packaged Goods industry. The 3-year average EBITDA growth rate is 28.3%, which ranks better than 77.87% of 1518 companies in the Consumer Packaged Goods industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Hostess Brands's ROIC was 5.62, while its WACC came in at 5.79.
Conclusion
In summary, the stock of Hostess Brands (TWNK, Financial) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 77.87% of 1518 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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