Should You Buy Shares in Hostess Brands or an Indulgent Twinkie?

Editors' pick: Originally published Nov. 7.

Even if you occasionally love taking a bite out of a Twinkie, it may be hard to indulge on soon-to-be-minted public company Hostess Brands

Hostess Brands, the maker of Twinkies and Sno Balls, will begin trading Monday on the Nasdaq under the ridiculously cute ticker TWNK. The snackmaker's road to becoming a public company is a complicated one.

An affiliate of private equity firm Gores Group completed the purchase of a majority stake in Hostess Brands for about $725 million on Friday, with the intent to bring the company public. The current majority owners of Hostess, Apollo Global Management and Metropoulos, anticipate holding a combined stake of about 42% in Hostess Brands upon completion of the listing.

In 2013, Metropoulos and Apollo acquired select Hostess Brands assets out of the liquidation of the old Hostess Brands company.

Back in July, when Gores expressed interest in listing Hostess Brands, it said it expects the company will have an initial enterprise value of a whopping $2.3 billion, or 10.4 times its forecast 2016 adjusted operating profit of about $220 million. In 2015, Hostess said it racked up $620.8 million in revenue and $88.8 million in profit.

Despite Hostess execs doing some serious work since it went defunct in 2013 to cut costs, improve manufacturing processes and introduce new snacks--such as fried Twinkies--the proposed valuation deserves heavy scrutiny by investors for several reasons.

First, Hostess has a track record of financial malaise as the nation has moved to healthier snacking and has been exposed to higher operating costs and excessive debt. In 2004, in the face of rising labor costs and fluctuating prices of flour and other ingredients, the company filed for Chapter 11 bankruptcy protection.
 
In 2012, the company again filed for Chapter 11 as it struggled under the weight of $860 million in debt and bloated labor force costs. Although Hostess likely cut a good bit of these legacy costs, it's unclear as to the extent as the company hasn't shared its financial statements as part of its listing. In other words, investors are somewhat in the dark as to whether Hostess has truly been able to shed its checkered past.  
 
Secondarily, Hostess doesn't appear to have reinvented itself yet to match current trends in snacking and get out from the slow growing center aisles of supermarkets. A casual glance at its website shows the company is still reliant on sugary delights such as Twinkies, Ho-Hos and chocolate cupcakes. With major retailers, including Walmart ( WMT) , Target ( TGT) and Kroger ( KR) devoting more shelf space to healthier snacks, it's hard to see how Hostess will remain relevant to increasingly waist-watching consumers. And if that's the case, Wall Street will likely over time re-value Hostess shares to below the proposed $2.3 billion enterprise value.
 
For now, investors may want to grab a Twinkie and watch to see if Hostess can prove it's able to deliver the goods financially. 

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