Nomad Foods Ltd. (NOMD, $25.73): “Stay Home, Stay Healthy & Eat Frozen Foods”
By: Katherine Nozel, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
• Nomad Foods Ltd. (NYSE: NOMD) manufactures and distributes frozen foods, including fish, vegetables, poultry, side dishes, ready meals, and desserts through large grocery retailers and supermarkets. The firm operates under one business segment, yet continues to build a global portfolio, primarily in Western Europe, through their several integrated acquisition brands.
• NOMD’s sources of revenue stem from markets including the United Kingdom (31% of FY19 revenues), Italy (17%), Germany (14%), and other European countries that generate the remaining 38% of revenues. NOMD revenues are expected to reach $3.36BN by 2023 according to TBRC’s Global Market Model estimates.
• NOMD owns ~2% market share in the frozen food manufacturing market as a result of continual YoY organic growth since 2016, due to strong asset conversion and low leverage.
• Although annual earnings will not face significant headwinds in response to COVID-19, analysts have lowered their adjusted EBITDA estimates for FY20 and FY21 given the Q4FY20 financials. As a result of timing of NOMD’s fiscal year, the company slightly narrowed its previous range of $542MM-$558MM to a $544MM-$560MM projection.
• NOMD’s stock performance has historically risen by 19.2% the past four years. NOMD could be heading to new 52-week highs as management excitedly evaluates several potential acquisition targets that have low risk and high accretion, looking to expand geographic footprint across Europe.
Key points:
Nomad Foods Ltd is benefitting from the elevated at-home consumption of consumers due to the COVID-19 pandemic. In 2019, the frozen food manufacturing market was valued at $161.04BN and is forecasted to reach $164.15BN by 2020, representing a CAGR of 2%. By 2023, the company is projected to continue growing at a rapid pace and reach a market value of $196.47 at a 5% CAGR.
Additionally, recent M&A activity has allowed NOMD to expand their reach to pizza and baked goods. NOMD maintains a strong cash flow position and management has refined M&A outlook priorities, targeting several smaller, European frozen assets. The company’s potential acquisition targets in the short term will likely be less capital intensive. NOMD is forecasted to add $350MM in annual revenues, triggering 5% synergies as a percentage of revenues through accretive acquisitions, financed by cash and additional debt financing.
The Green Cuisine brand has continually expanded NOMD’s plant-based presence and attracted a new customer base. Millennial shoppers are highly interested in healthy and sustainable food options which has benefitted NOMD, especially throughout the pandemic. The company plans to invest $10MM into Green Cuisine in marketing and promotional support to retain additional buyers in other various age groups.
It is important to note that the company trades with a float of 86.80%, with the top five shareholders possessing ~30% ownership of the company. Further, operating margin is expected to expand 100 bps to 16.5% in FY21, driven by innovation and revenue management. NOMD has a strong management team that prioritizes brand development and meaningful cost savings across each brand.
What has the stock done lately?
NOMD dipped to $16.65 in March FY19, yet the price of the stock has grown steadily to a current price of $25.73. Although the 52 Week Range of $14.08-$26.41 is slightly volatile, management’s efforts of cost savings and brand synergies will improve stock performance moving forward.
1 Month Stock Price Chart
Source: FactSet
Past Year Performance:
Since October FY19, NOMD has increased 30.55% YTD, outperforming the market in Q3FY19. In FY20, EPS was $0.34 in Q1 and rose to $0.37 in Q2. In March, NOMD announced a $300MM share repurchase program which caused the stock price to dip and then increase slowly through the duration of the fiscal year. Based on FY19’s performance and managements’ recent proposed initiatives, NOMD’s performance will likely exceed expectations in FY20 and beyond.
1 Year Price Chart vs. Benchmark
Source: FactSet
My Takeaway
NOMD was pitched and added to the AIM International Fund in January 2018 at a price of $17.15, with a price target of $20.55. NOMD’s current price has surpassed the initial analyst’s price target with a current price of $25.68 As consumer demand increases for convenient food alternatives, due to stay at home orders and travel bans initiated by the pandemic, NOMD will continue to dominate market share through their strategic initiatives of geographic expansion and accretive M&A. NOMD has been advantageous to the AIM International Fund over the course of the last two years and based on future projections from management and street analysts, the company will continue to add value to the portfolio. Therefore, I believe we should buy additional shares of Nomad Foods Ltd. So, stay home, stay healthy, and eat frozen foods.
