Nomad Meals: A Steady Participant Ignored By The Market (NYSE:NOMD)

Nomad Meals (NYSE:NOMD) is a number one firm within the European frozen meals market, holding a 16% market share, with well-known manufacturers as seen within the picture beneath. With strong monetary well being, a administration workforce centered on creating worth by efficient capital allocation, and growth alternatives, the market is undervaluing a wonderful enterprise.

On account of all of the factors, I’ll clarify beneath, I imagine the inventory is undervalued by the market, and my suggestion is a purchase.

Firm overview

Nomad Meals is an organization with very steady development that produces and distributes frozen merchandise, primarily to grocery store chains. Its predominant market is Europe, with the UK, Germany, Italy, and France accounting for 60% of its income. Its flagship product is fish, which represents 40% of the corporate’s whole operations.

The corporate’s development technique is each natural and inorganic. The previous is primarily pushed by a rise in quantity or costs, whereas the latter is achieved by the acquisition of latest corporations to ascertain itself as a market chief. As an illustration, “Iglo,” a number one model, was acquired by the corporate, enabling its entry into the German market. One other instance is “Findus,” a model by which the corporate expanded into Italy, France, Spain, Sweden, Switzerland, and Norway.

The inventory value has declined from $21 to $18.8 over the previous 5 years—a state of affairs that, for my part, is just not justified provided that gross sales have grown at an annual charge of seven%, and the corporate has maintained steady margins.

Market outlook and firm steerage

The present whole marketplace for frozen merchandise in Europe, the place Nomad Meals focuses its enterprise, is valued at $152 billion and is anticipated to develop to $253 billion by 2033, representing a CAGR of 5% over the subsequent 10 years.

Within the newest earnings presentation (Q2 2024), Nomad Meals exceeded analysts’ expectations for EPS, reporting $0.44 per share (vs. $0.42 anticipated), however fell brief on gross sales, posting $753 million (vs. $760 million anticipated). Regardless of this, the corporate reaffirmed its natural development steerage of 3-4% for 2024.

For my part, the mid-single-digit gross sales development steerage is sustainable given market expectations and might be elevated to a mid-to-high single-digit vary with the assistance of acquisitions.

Capital allocation: A constructive catalyst

Personally, capital allocation is some extent I extremely worth within the corporations I put money into. Nomad Meals is a transparent instance of this.

Firstly, in 2024, the corporate started paying a quarterly dividend of $0.15 per share, which equates to a 3.2% dividend yield with solely a 30% payout ratio. That is the bottom payout within the sector in comparison with opponents like Unilever, which has a 64% payout, or Kellanova, with an 85% payout. This low payout leaves room for future dividend will increase.

Secondly, share buybacks. Within the following picture, it may be seen how the administration has constantly repurchased shares following the inventory’s decline, a transfer I discover applicable. Moreover, the anticipated free money circulate for 2024, in accordance with my estimates, is $173 million. If 30% is allotted to dividends, the corporate would have $122 million accessible for share buybacks. Being conservative, the corporate might purchase again 3% of its excellent shares in 2024 at present values if it makes use of solely 75% of that quantity. This could additional increase EPS development.

Over the previous 5 years, the corporate has lowered its excellent shares by 16% as a result of low valuation the market locations on a steady enterprise with respectable natural development.

Lastly, the acquisition historical past. The corporate’s acquisitions are based mostly on corporations with gross sales larger than $1 billion and paying an EV/EBITDA a number of of lower than 10x.

All through its historical past, acquisitions have supplied average development, main the corporate to succeed in $3 billion in gross sales in 2023.

Monetary overview

This picture shows the corporate’s financials and their evolution over the previous seven years. All metrics have proven development considerably exceeding the UE GDP, which generally grows round 2%-3% beneath regular situations.

Gross sales have elevated from $1.927 billion in 2016 to $3.044 billion in 2023, representing a CAGR of seven%. Nevertheless, EPS has grown considerably extra, at a charge of 33%, primarily as a result of share buybacks I beforehand talked about as a constructive catalyst. The corporate’s ROE has remained constant through the years, reflecting its stability. Whereas the ROE is beneath the market common (15%), the ROE excluding goodwill is effectively above the market common. Contemplating the corporate’s technique of capital allocation by acquisitions, with the latest being Fortenova in 2021, I imagine it’s applicable to contemplate this latter ratio.

An important side of the corporate’s financials that I wish to spotlight is its debt, which generally operates between 3x to 4x Internet Debt/EBITDA. Though that is frequent in a steady sector the place most corporations function with leverage, Nomad Meals is amongst these with the best ratios, which negatively impacts FCF when rates of interest are excessive, as they’re now. That is evidenced by a 40% improve in curiosity bills over 4 years, from $58 million in 2020 to $82 million in 2023.

The growth of the curiosity/FCF ratio has been largely pushed by the truth that of the $2.135 billion the corporate holds in debt, $1.253 billion is topic to the EURIBOR charge, which is variable and has skilled a big improve since 2022, rising from unfavourable charges (-0.5%) to three.5% in 2024.

Moreover, I wish to embody a chart I designed utilizing data from the corporate’s monetary statements, displaying the evolution of its metrics over the past seven years.

On this picture, we are able to see how metrics comparable to FCF and EPS had been considerably affected by the rise in rates of interest from 2022 to 2023.

One ultimate level I wish to emphasize is that though corporations working with debt typically battle throughout crises, Nomad Meals, as a producer and distributor of important items like meals, sometimes navigates crises effectively, sustaining gross sales, margins, and efficiency ratios, as was the case in 2020 throughout the pandemic.

Dangers

For my part, there are three dangers that may considerably have an effect on the FCF if they’re constant over time.

On the one hand, the dependence of the corporate on third events for the provision of uncooked supplies and oblique duties comparable to logistics or packaging. For instance, a world improve within the value of salmon can have a direct affect on the price of the product, and there’s a sure issue in elevating the ultimate product value with the identical tempo.

One other disadvantage is the seasonality of sure uncooked supplies, particularly greens. There are uncooked supplies which might be produced at particular season, so the corporate should accumulate inventory to satisfy demand. An error in estimating the required amount might result in a lack of uncooked supplies if demand is decrease than anticipated or a lack of potential gross sales if demand exceeds expectations.

Lastly, excessive rates of interest that strongly have an effect on FCF. Thus far, the corporate has proven robust monetary resilience to mitigate this affect, but when these rate of interest ranges persist over the subsequent three years, the state of affairs might considerably worsen.

Valuation

The present valuation means that the corporate is undervalued. As we’ve seen within the monetary evaluation, Nomad Meals has achieved mid-single-digit CAGR throughout all metrics, however with well timed share buybacks, EPS has grown by 33%. Primarily based on Francois Rochon’s thought, which posits a direct relationship between EPS and inventory value over the long run, I observe a spot that serves as an preliminary indication supporting my purchase suggestion.

For my part, the honest worth for NOMD, contemplating its anticipated development, future share buybacks, the stage of the enterprise cycle the corporate is in, and comparisons with its opponents, can be 15-17 instances the P/E a number of at most. Primarily based on my 2025 EPS forecast of $1.98, this may give a good worth vary of roughly $31.62 – $33.6.

Since I imagine that the P/E ratio might not be the most effective profitability metric, I can even proceed with a DCF valuation.

Contemplating the next assumptions: WACC of 6.68%, TGR of three.5%, TDR of 10%, and anticipated FCF development of 8% (pushed by 4% income development, benefiting from share buybacks as a typical firm coverage, and probably decrease rates of interest), I derive a good worth of $12.8 per share. The principle distinction between this technique and the earlier one is that in a DCF mannequin, debt is taken into consideration, so leveraged corporations like NOMD are extra adversely affected.

One other chart:

When evaluating the efficiency of Nomad Meals to the Russell 2000, since our firm is a small cap, the index has returned 38% to buyers, in comparison with -14.9% for Nomad Meals. That is one other indication that it represents an amazing alternative, given the cumulative return, as EPS has grown by 33% yearly.

Conclusion

Nomad Meals is an organization with very steady monetary well being, that includes 4% natural gross sales development, steady margins, ROIC with out goodwill above the market common, and sound capital allocation that has pushed EPS development by 33%, which has not been mirrored within the inventory value. I imagine that the market is afraid of the present excessive rates of interest and the way the corporate can take care of this case, however in the intervening time it’s doing very effectively.

On this foundation, I imagine that the corporate is undervalued, and at present costs, it might probably provide a return of 18% to twenty% over the subsequent 5 years. A inventory that has been in my portfolio since December 2023 and I count on it would stay there for a few years to return.