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Why Hostess Brands, Inc. Stock Popped on Thursday

What happened

Shares of Hostess Brands Inc. (NASDAQ: TWNK) climbed as much as 10.1% early Thursday, then settled to close up 7.7% after the baked goods specialist announced better-than-expected third-quarter 2017 earnings.

More specifically, Hostess' revenue declined 2% year over year on a pro forma basis to $192.3 million. That translated to adjusted net income of $14.5 million, or $0.14 per share, down from $15.2 million, or $0.16 per share in the same year-ago period. Analysts, on average, were only expecting adjusted earnings of $0.12 per share, but on higher revenue of $199 million.

IMAGE SOURCE: HOSTESS BRANDS

So what

Hostess' top line included a modest 0.5% decline in revenue for its core sweet baked goods segment -- to $173.6 million -- primarily as a $17 million boost from this year's product "innovations" -- namely Chocolate Cake Twinkies, White Fudge Ding Dongs, and Golden CupCakes -- couldn't quite offset a $14 million decline from 2016 innovations, a $3.2 million impact from a co-manufacturer's product challenges, and a $2.2 million impact from discontinued items. To a lesser extent, revenue growth was held back by hurricane-related disruptions at point of sale.

Meanwhile, sales from Hostess' other products decreased by $3 million, to $18.7 million, mostly due to a decline in revenue from Deep Fried Twinkies.

Nonetheless, Hostess CEO Bill Toler noted each of the company's major brands enjoyed "solid" growth, adding, "We have entered the fourth quarter with strong top-line momentum, an improving category in sweet baked goods and robust product innovation."

Now what

Hostess now anticipates full-year 2017 revenue in the range of $775 million to $781 million, good for growth of 6.5% to 7.3%, and earnings per diluted share of $0.58 to $0.60. By comparison, three months ago Hostess told investors to expect revenue near the high end of its current outlook, but with earnings near the low end of its new range. Analysts were less optimistic on the top line, calling for 2017 revenue of $776.7 million and earnings of $0.59 per share.

All told, this was a strong quarter for Hostess that appeased Wall Street's worst-case concerns. With shares trading near a 52-week low heading into the report, it's no surprise investors are bidding up Hostess stock again.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.