The Ratings Game: Hostess shares sink after news that ‘driving force’ CEO is retiring

Hostess CEO Toler’s retirement announcement was a surprise, but most analysts believe the company will be fine

The surprise retirement of Hostess Brands Inc. Chief Executive Bill Toler has prompted an analyst downgrade and a steep 9.8% drop in the company’s stock, but most analysts believe the company will still do well.

The Twinkies parent

TWNK, -9.49%

said late Thursday that Toler would retire as CEO effective March 1, 2018, or even sooner if a replacement can be found. He will, however, stay on the company’s board.

Hostess has created a subcommittee to vet both internal and external candidates for the job. Dean Metropoulos, executive chairman of the board, will take up additional duties during the transition period, the company said.

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The news sent Hostess shares plummeting in Friday trading. UBS downgraded the company’s stock to sell from neutral, reflecting “slowing category trends, market share loss in its Sweet Baked Goods unit (93% of profits), and recent management turnover.”

UBS believes Toler is the “driving force” behind the company’s success, and coupled with the recent departure of the company’s chief operating officer Stuart Wilcox, analysts are cautious.

“[O]ur chief concern is Hostess’ core category slowing and the cost to gain incremental market share is rising,” the note said.

UBS cut its price target to $11 from $16.

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However, other analysts are far less concerned about the impact that Toler’s departure will have.

RBC Capital Markets maintained its outperform rating, citing Toler’s continued presence on the board, his $1 million stock acquisition on August 11, “which [they] interpret as a vote of confidence,” and the interim help from Metropoulos, who RBC analysts call “perhaps the most hands-on chairman in packaged food.”

“In our view, Hostess remains both an advantaged top-line performer and a platform for growth within the broader snacking universe through M&A,” analysts led by David Palmer wrote.

RBC has a price target of $16 on Hostess’ stock.

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J.P. Morgan analysts and the people they spoke with also expect Hostess will be looking for “large-scale M&A” opportunities. The concerns that analysts there have are separate from the CEO news.

“We continue to believe that Street sales and earnings before interest, taxes, depreciation and amortization estimates for the third quarter are too high; and the deceleration in the core sweet snacks category, along with recent weakness in velocity and limited variable cost flex, are likely to drive top- and bottom-line misses,” analysts led by Joshua Levine wrote.

J.P. Morgan maintained its neutral stock rating.

The FactSet consensus is for third-quarter earnings of 12 cents per share and sales of $199 million.

J.P. Morgan spoke with Toler, who said the company is looking for a Kansas City-based leader “who can be part of the ‘community, culture and fabric’ of the company for years to come.” Toler has been commuting to Kansas City from Florida, according to SunTrust Robinson Humphrey, who also spoke with him.

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SunTrust analysts expressed surprise and disappointment about Toler’s departure, but say the “heavy lifting of the turnaround is complete and Toler’s expertise comes from turnarounds (this was his fourth), not running a day-to-day business.”

“We are confident, based on our meetings with the extended management team over the past year that the business will not miss a beat in Toler’s absence,” analysts wrote.

SunTrust rates Hostess shares buy with a $20 price target.

Hostess shares are down 23.4% for the last three months, but up 9.8% for the past year. The S&P 500 index

SPX, +0.19%

is up nearly 20% for the past 12 months.