Flowers Foods Inc.'s shares jumped in Monday trading as investors bet that the bakery company may benefit from the liquidation of Hostess Brands Inc.
THE SPARK: Hostess, which makes a number of well-known products such as Wonder Bread, Twinkies and Ding Dongs, was in bankruptcy court Monday to start the process of liquidating itself.
The company decided that it no longer could make it through a conventional Chapter 11 bankruptcy restructuring. Instead, it's asking the court for permission to sell assets and go out of business.
Hostess has said it received inquiries about buying parts of the company but has not disclosed who those buyers may be. Some analysts think Flowers Foods may take over one or more parts of the Hostess business. A spokesman for Flowers Foods could not be reached immediately for comment.
THE BIG PICTURE: Hostess has struggled with heavy debt, management turmoil, rising labor costs and the changing tastes of America. However, its iconic brands remain an attractive investment.
THE ANALYSIS: KeyBanc Capital Markets analyst Akshay Jagdale said he expects Flowers Foods will benefit from the Hostess liquidation.
The analyst said he has always seen Flowers Foods as one of the best operators in the bakery business and has a positive view of the management team. But he has long held a poor view of the bakery industry, which he saw as over-crowded with high costs and weak volume trends.
The liquidation of Hostess, however, should improve the market for the remaining players.
Jagdale upgraded his rating on Flowers Foods shares to "Buy" from "Hold" and set a price target of $25. He expects the company's sales should improve, either organically or by acquisition, as a result of the Hostess liquidation.
The analyst said lower industry capacity, increased consolidation and lower industry promotion levels should lead to an expansion in the industry's profit pool. He expects Flowers Foods or Grupo Bimbo, another major bakery company, will buy up most of Hostess' assets. He argues that Flowers Foods makes the more logical buyer since it overlaps in more markets with Hostess.
SHARE ACTION: Flowers shares rose $1.25, or 5.6 percent, to $23.57 by in afternoon trading. The stock gained more than 20 percent last week with the demise of Hostess. It is near the top of its 52-week trading range of $18.39 to $24.20.