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 (26.9% FY19), Italy
(17.7%), Germany (14.3%), France (8.9%), all of which grew organically in Q3.
Other European countries generate the remaining 32.3% of revenue. Since Q1 FY18,
revenue has increased 8.9% to $1,883MM.
• NOMD expected an
adjusted EBITDA between $466MM-$477MM in FY19, and after Q3, confidently narrowed
its previous range to a $471MM-$477MM projection.
• Management is satisfied
with the performance of FY19 thus far, and expects to heighten long-term
shareholder value through NOMD’s strong balance sheet position with over $777MM
of cash and 2.8x leverage as of Q3.
• 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:
Analysts were sensitive
towards Nomad Foods Ltd. as Q3 FY19 approached due to recently lumpy trends.
However, NOMD exceeded expectations with +2.5% YOY organic sales growth, from
the core portfolio for the 11th consecutive quarter. Sales are
forecasted to increase as the newly acquired Green Cuisine, a plant-based
brand, plans to expand beyond the United Kingdom in FY20, while enhancing the
brand’s quality and taste.
Additionally, NOMD
continues to prioritize meaningful cost savings and synergies across all
brands; SG&A expenses decreased 80 bps from the prior year. Further, gross
margin increased 110 bps to 29.5% as a result of improved pea supplies,
operational improvement in the Goodfellas brand, and pricing adjustments to
fish prices. According to Wells Fargo Securities, the integration of Aunt
Bessie’s and Goodfellas Pizza, two FY18 acquisitions, will trigger an EBITDA
margin target of 20% in FY21. NOMD strategically aims for double-digit YOY
EBITDA growth with 14% growth last quarter.
NOMD maintains a strong cash
flow position in which robust growth opportunities via additional acquisitions
will provoke an increased stock price. Management’s tone during a Q3 press
release and earnings call suggests an upcoming acquisition. The CEO revealed
that he and management are currently evaluating several potential targets to blend
into the core business that will not be effected by risks of Brexit. NOMD intends
to continue investing heavily in “Must Win Battles,” strengthening core icons
to develop distinctive brands within the portfolio.
What
has the stock done lately?
Although NOMD dipped to
$18.89 in October FY19, prices since, have grown steadily to a current price of
$20.71. Although the 52 Week Range of $15.87-$23.06 is slightly volatile,
management’s strong grasp on cost savings, alongside future acquisition
intentions, will improve stock performance moving forward.
1
Month Stock Price Chart
Source:
FactSet
Past
Year Performance:
Over the course of FY19,
NOMD increased 23.89% YTD, outperforming the market in Q2 and Q3. EPS was $0.13
in Q1, rising to $0.24 in Q2, and slumping back down to $0.20 in Q3. Based on
FY19’s performance and recent management’s proposed initiatives, NOMD’s performance
will likely exceed expectations in FY20.
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 $20.71. In January FY18, the
frozen food market in Europe was forecasted to grow at a CAGR of 4%. As demand
increases for convenient food options in a similar fashion to FY18, NOMD will
continue to dominate market share through their strategic initiatives of
geographic expansion and M&A. Over the course of the past year, NOMD has
been advantageous to the AIM International Fund and based on future
projections, will continue to add value. Therefore, I believe we should buy
additional shares of Nomad Foods Ltd. So, NO getting MAD, this is rad!
