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Best Bear Market Buy: Hostess Brands vs. J&J Snack Foods

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Comfort foods tend to thrive in times of economic uncertainty, especially those that are inexpensive. Packaged food suppliers have shown resilience throughout the pandemic and the resulting inflationary fallout.

However, to curb rising labor, supply chain and raw material costs, food suppliers have been raising prices over the past year, which may be a slippery slope if consumers are forced to trade for generic counterfeits.

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

The case of hostess brands

After hitting an all-time high of $29 last November, shares of Hostess Marks (TWNK 2.01%) have since fallen more than 21%. Investors must now weigh the Twinkie maker’s past performance and future prospects to determine whether this drop 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 revenue year over year. The sweet bakery category, which accounts for nearly 90% of total sales, grew 18.7%. Cookie sales, in particular, jumped 33.2% from the third quarter of 2021, largely due to Hostess’ strategic acquisition of the popular Voortman Cookies brand in 2020.

Despite record sales, profitability has been strained for Hostess, mainly due to inflation and a disrupted supply chain. To counter declining margins, 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 affirmed Hostess’ commitment to recouping its gross margin through overall efficiency improvements across all company operations. As a sign of confidence, Hostess has also raised its forecast for the year 2022 from 15% to 17%-19%.

The case of J&J Snack Foods

J&J Snacks (JJSF 2.03%) the stock has fallen more than 10% in the past month and is now trading around 24% below its all-time high from 2019. But the company has posted four straight quarters of record earnings, so investors are skeptical. are probably asking whether or not to buy the dip on J&J Snack Foods – best known for SuperPretzel, ICEE and now Dippin’ Dots.

The New Jersey-based snack food supplier reported record net sales of $400.4 million in the fourth quarter of its fiscal 2022, benefiting from growth across its foodservice lines – churros, soft pretzels and especially frozen novelties.

After acquiring world-famous brand Dippin’ Dots in the fourth quarter, J&J more than tripled its frozen novelty revenue in the quarter. Excited to continue pushing Dippin’ Dots into under-penetrated markets, CEO Dan Fachner said the Dippin’ Dots brand “aligns perfectly” with J&J’s existing snack portfolio and overall business model. . Expansion efforts have worked so far, with Dippin’ Dots posting 18% year-over-year growth in the fourth quarter.

Regardless of strong sales, increased transportation and raw material costs have impacted profitability in recent quarters. For example, despite record revenues, fourth quarter net income of $17.3 million marked an 8.3% year-over-year decline. Undeterred by the current economic climate, Fachner and his team have implemented a combination of price increases and cost reduction initiatives, and he assures that “the best is yet to come” for J&J Snack Foods.

Which stock of basic consumer goods is a better buy?

Since these two consumer staples stocks have similar market caps, let’s compare their price-to-earnings ratios to determine which makes a better buy in today’s market. We’ll also look at both companies’ price-to-book ratios and year-over-year growth estimates to paint a more complete picture.

Metric Hostess Marks J&J Snacks
Market capitalization $2.98 billion $2.88 billion
Price/earnings ratio 18.6 60.8
Price/book ratio 1.7 3.3
Expected year-on-year EPS growth rate* 13.4% 18.5%

Data source: Yahoo finance, *average analyst estimate

With both a lower price-to-earnings ratio and lower price-to-book ratio, Hostess emerges as today’s winner. But given recent corporate developments and stronger earnings growth prospects, J&J Snack Foods also looks like a solid long-term investment. Between these two beloved candy makers, you really can’t go wrong.

Micah Angel has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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