Nomad
Foods Ltd (NOMD, $21.27): “No-Madder What, Hold the Line”
By: Jake
Bernarde, AIM Student at Marquette University
Disclosure:
The AIM International 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) is
a frozen foods company engaged in markets around the world. They primarily
do business in Western Europe with a portfolio of goods including fish,
vegetables, pizza, meats, meals, and more. Founded in 2014, the company is
headquartered in Middlesex, the United Kingdom.
- There
is some uncertainty surrounding Russia’s invasion of Ukraine and its
potential impact on the company’s fish supply. Over 50% of NOMD’s fish
comes from Russia, so alternative sources of supply may become necessary.
- NOMD
must overcome inflationary pressures to drive EBITDA growth, which has
grown at a 5Y CAGR of 10.4%.
- In
2021, NOMD acquired Fortenova, a leading European frozen food company, which
combined with its current operations, will add value in the coming years.
- Down
~29% over the past year, NOMD shares are trading at a key level.
Key
points: NOMD has met headwinds since the
beginning of 2022, but its impact on sales and profit is not a long-term issue.
The reliance on Russia for fish would drive price inflation if the export of
fish were banned as other sourcing options are more costly, but this outcome is
very unlikely and would affect the entire industry. Management communicated
that the company has had no issues with supply coming from Russia, although the
firm is beginning to diversify away its reliance on Russian Fisheries. Also,
management indicated that the firm could switch to a different species of fish
or leverage their plant-based products if the Russian invasion does disrupt
supply.
NOMD
has successfully created cost savings and leveraged synergies over the past 5
years to create double-digit EBITDA growth. Through the rest of 2022 and into
2023, the company must offset higher costs, through strong pricing power, level
SG&A expenses, and an increase in demand for frozen foods. Although, this
is not a challenge unique to the company, rather an industry-wide obstacle.
While
the benefits of the acquisition of Fortenova are reflected in street
expectations, the synergetic upside has been overlooked due to recent concerns
surrounding costs and supply chain threats. Even so, Nomad is trading at a
discount to its U.S. peers (GIS, KHC, HRL, TSN) based on forward 2022 P/E multiple
of 13x versus a peer multiple of 17x. NOMD’s future earning potential is not reflected
by its current trading price.
What
has the stock done lately?
NOMD’s
shares dropped sharply in early March after its Q1 earnings report, falling to 52-week
lows and down ~17% YTD. Since the YTD lows of $19.75 shares rallied to over
$23.00 and are now pushing to YTD lows once again. There have been numerous
negative factors influencing NOMD, including higher costs and supply chain
threats, but shares may be oversold.
Past
Year Performance: NOMD is trading well
below 2021 and all-time highs, currently down ~48% since mid-2021. Nomad’s
returns are -29% over the past year compared to the MSCI ex. US benchmark,
which returned -9.2% over the same period.
My
Takeaway
Despite inflationary pressures, potential
supply chain challenges, and y/y EBITDA
decline in Q1 FY22, NOMD’s share price has room to run if it can overcome current
headwinds. NOMD can offset higher costs and is currently undervalued relative
to peers, despite cost and pricing concerns. The growing frozen food market
will drive low single-digit organic sales growth over the next 3 years and the acquisition
of Fortenova and others will drive market share dominance by NOMD. Given both a
lack of visibility surrounding potential headwinds and future growth potential
it is recommended that the AIM International fund continues to hold their
position in NOMD.
