A Better Buy in a Bear Market: Hostess Brands vs. J&J Snack Foods

Comfort foods tend to thrive in times of economic uncertainty, especially those that are cheap. Packaged food suppliers have shown resilience during the pandemic and the effects of inflation.

However, to contain increased labor, supply chain and raw material costs, food suppliers have raised prices over the past year, which can be a slippery slope if consumers are forced to switch to generic products.

Let’s take a look at two snack companies that have shown particular strength over the past few years and determine which is the better buy in today’s market.

The case for hostess brands

After hitting a high of $29 last November, shares of Hostess Brands (TVNK 2.01%) since then they have fallen by more than 21%. Investors now need to weigh the Twinkie maker’s past performance and future prospects to determine whether this dip is worth buying or not.

Hostess achieved record sales of $346.2 million in the third quarter of 2022, an increase of more than 20% in organic net income compared to the previous year. The sweet pastry category, which accounts for almost 90% of total sales, grew by 18.7%. Cookie sales, in particular, jumped 33.2% from the third quarter of 2021, largely due to the strategic acquisition of Hostess’ popular Voortman Cookies brand in 2020.

Despite record sales, profitability was stretched for Hostess, primarily due to inflation and a disrupted supply chain. To counter the margin squeeze, Hostess implemented a series of price increases to cushion its net profit margin.

With future price increases now reserved as a last resort, CEO Andy Callahan reaffirmed Hostess’ commitment to restoring its gross margin with across-the-board efficiency improvements in the company’s operations. In a sign of confidence, Hostess also raised its full-year guidance for 2022 from 15% to 17%-19%.

The case for J&J Snack Foods

J&J Snack Foods (JJSF 2.03%) The stock has fallen more than 10% over the past month and now trades roughly 24% below its 2019 high. But the company has posted four straight quarters of record revenue, so investors are likely wondering whether or not to buy the dip in J&J Snack Foods – best known for Superpretzel, ICEE, and now Dippin’ Dots.

The New Jersey-based snack food purveyor posted a record $400.4 million in net sales during the fourth quarter of fiscal 2022, enjoying growth across its foodservice lines — churros, soft pretzels and, most notably, frozen novelties.

After acquiring the world-renowned Dippin’ Dots brand in the fourth quarter, J&J more than tripled its frozen novelty revenue during the quarter. Excited to continue pushing Dippin’ Dots into underpenetrated markets, CEO Dan Fachner said the Dippin’ Dots brand is a “perfect fit” with J&J’s existing snack portfolio and overall business model. The expansion efforts have worked so far, with Dippin’ Dots posting 18% year-over-year growth in the fourth quarter.

Despite strong sales, increased transportation and raw material costs have weighed on profitability in recent quarters. For example, despite record revenue, Q4 net profit of $17.3 million was down 8.3% year over year. Undeterred by the current economic climate, Fahner and his team have implemented a combination of price increases and cost-saving initiatives, and he assures that “the best is yet to come” for J&J Snack Foods.

Which consumer staples stocks are the better buys?

Since both of these consumer staples stocks have similar market capitalizations, let’s compare their price-to-earnings ratios to determine which one makes the better buy in today’s market. We’ll also look at both companies’ price-to-book ratios and one-year growth estimates to get a more comprehensive picture.

Metric Hostess Brands J&J Snack Foods
Market Capitalization 2.98 billion dollars 2.88 billion dollars
Price-earnings ratio 18.6 60.8
Price to book ratio 1.7 3.3
Earnings per share growth rate for one year* 13.4% 18.5%

Data source: Yahoo finance, *average analyst estimate

With a lower price-to-earnings and price-to-book ratio, Hostess comes out as today’s winner. But because of the company’s recent development and a stronger outlook for earnings growth, J&J Snack Foods also looks like a solid long-term investment. Between these two much-loved creators of sweet treats, you really can’t go wrong.

Micah Angel 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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