When Nomad Foods Limited (NYSE: NOMD) fell to a five-year low last week, investors decided enough was enough.
Buyers began nibbling at the UK-based company ahead of the publication of its preliminary financial results on Halloween day. The timing of the bottom feeding looks frighteningly good as the stock is now up more than 20% from its low of $12.50.
The mid cap freezer specialist could use a break.
Supply chain challenges and the Russian invasion of Ukraine have made it difficult for management to provide a palatable prospect. The impact of inflation on consumers’ ability to spend on ready-to-eat entrees is another reason the market is putting stock on ice.
Nomad can finally thaw thanks to an optimistic preliminary Q3 report.
Let’s dig further.
What is Nomad Foods’ growth strategy?
Nomad Foods owns a portfolio of frozen foods, the most well-known to Americans being the Birds Eye vegetables. Clarence Birdseye was credited with inventing frozen foods when he launched Birdseye Seafoods exactly 100 years ago. Since then, the company has added the frozen brands Ingus and Findus and, more recently, Goodfellas frozen pizzas and Aunt Bessie’s frozen meals.
To this day, Nomad sticks to the frozen food script. Why frozen?
The category has proven to be a resilient throughout the economic cycle, especially as consumers can stock up and store the items at will. Growth is expected to continue in line with shoppers’ growing preference for healthy and convenient food. More than 80% of Nomad’s portfolio is considered a healthy choice. Three quarters of the products are chicken, fish or vegetables.
While bringing brands into the freezers of supermarkets remains at the heart of the growth strategy, e-commerce is also an evolving catalyst. With grocery delivery gaining popularity in the wake of the pandemic, more frozen items are being dropped off doorsteps than ever before. With Birds Eye already one of the top online supermarket brands in the UK, the growth of e-commerce will be a key driver of growth.
Acquisitions are another important growth component. The European frozen food business is fragmented and Nomad plans to consolidate it in the future. It has bought out four companies since its inception in 2015, including last year’s purchase of Fortenova. Management expects to use the cash generated in the core business to expand the portfolio.
How will Nomad Foods perform in 2022?
Taking supply chain and geopolitical headwinds into account, Nomad Foods is holding up pretty well into 2022. It helps when your products are in constant demand and number one or two in most of the portfolio.
Nomad’s preliminary readout for the third quarter showed sales were up 7% as price increases helped offset lower volumes. The highlight, however, is that profitability has moved higher despite the weakened macro environment. Expanding the gross margin from 28.0% to 29.1% shows that higher raw material costs are effectively absorbed by the consumer. This reflects the defensive nature of the stock.
Management reaffirmed its expectations for earnings growth with “high single digit” earnings in 2022, including a full-year contribution from Fortenova. More importantly, it told the market that profits are rising – and that the stock might be too oversold.
The technical indicators seem to agree. On October 24, Nomad Foods fell outside the lower Bollinger Band and the RSI plunged below 30 on the daily chart. Since then, the above-average trading volume has increased.
Is Nomad Foods a Good Defensive Stock?
Barclays and UBS have read well about Nomad Foods. Earlier this month, both research firms reiterated buy recommendations for the stock with price targets of $18 and $19, respectively.
At current levels, Nomad Foods is trading around 9x next year’s earnings estimate. This is an attractive valuation, even when compared to the average P/E of the consumer goods sector. This has expanded in recent months on a flight to safety.
However, potential investors should note that the company does not currently pay a dividend. Dividends are a primary attraction of defensive stocks, which makes Nomad a bit less attractive. In contrast, domestic packaged food players like Kraft Heinz (4.1% yield) and General Mills (2.6% return) come with significant cash payouts.
What Nomad Foods does offer what these companies don’t is direct exposure to Western Europe, where it is the market leader in frozen foods. This makes it an under-the-radar way to play defense and gain exposure to the healthy eating theme.
With a five-day winning streak from an extended bottom, Nomad looks set to stay higher.