Why Hostess Brands Stock Jumped This Week

What happened

Week to date, shares of Hostess Brands (NASDAQ:TWNK) were up 18.8% as of 3:30 p.m. ET on Thursday , according to data provided by S&P Global Market Intelligence.

Earlier this week, J.M. Smucker agreed to acquire the maker of Twinkies for approximately $5.6 billion. The transaction value is a big premium for the owner of leading snack brands that has been posting steady sales growth this year.

So what

The deal is expected to close in J.M. Smucker's fiscal third quarter ending in April. At that time, Hostess shareholders will receive $30 per share in cash and 0.03002 shares of J.M. Smucker stock for each share of Hostess.

Based on Hostess Brands' current share price, J.M. Smucker is paying over 20 times Hostess' trailing operating income, or earnings before interest and taxes (EBIT), on an enterprise value (EV) basis. This valuation is consistent with high-performing consumer goods brands. For example, snack food powerhouse Mondelez International and Procter & Gamble also trade around the same EV-to-EBIT ratio.

Now what

Hostess Brands has steadily grown revenue and earnings per share over the last three years. The company has done a good job squeezing more profit out of the business, which has sent the stock up 175%.

J.M. Smucker is getting a collection of top snack brands that are driving consistent sales performance. Hostess Brands said its revenue increased by 3.5% year over year in the second quarter, and the consensus analyst estimate calls for earnings per share to increase 14% for the full year.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends J. M. Smucker. The Motley Fool has a disclosure policy.