THE HEDGEYE EDGE
Nomad Foods (NOMD) is Europe’s leading frozen food company. Its brands are usually the #1 or #2 brand in each country it competes in. The following slide presents the company’s sales mix by country and brand.
Nomad Foods is well-positioned with share leadership in the markets it competes within the growing freezer category. In Western Europe, the market size is €27bn and has been growing 2% annually with limited cyclicality. Frozen foods are driven by secular trends in wellness, environmental consciousness, and convenience. The company has been outpacing its category. The market has not given Nomad Foods the multiple it deserves for its track record of organic growth, the stability of the category, and its competitive position.
Nomad Foods is poised to benefit from a shift in spending from food away from home to food at home. Grocery stores had the biggest stockpiling of food in decades ahead of government restrictions on outdoor movement. Even after the lockdowns are eased, consumers will still consume more meals at home due to concerns over COVID-19 and the ensuing recessionary impact on consumers’ incomes. In the past month, consumers have had one of the largest trial periods of products in the grocery store giving Nomad Foods the opportunity to reach new customers and re-engage lapsed consumers. Online grocery still has a small penetration of the market, but it received a boost from the stay at home restrictions. Strong brands have greater share online, and the company's brands are often #1 or 2 in its markets.
Two weeks ago management provided an update two months into the quarter. Nomad Foods said organic revenue is tracking ahead of expectations and is now expected to increase in the low-double-digit range. Organic revenue grew 14% through the first two months of the quarter. Management’s previous guidance was MSD% organic growth for the year. Consensus expectations for Q2 revenue were 8% growth. The 14% organic growth the company has seen so far in Q2 is being driven by more consumption of frozen foods across all dayparts, as seen in the following slide from the company’s presentation.
In supplementing its organic growth, Nomad Foods has been adding Western European frozen food companies, extracting cost savings, investing in growth initiatives, and plugging them into its strategic framework. Even though it has the largest share in the markets it competes in, the categories are fragmented. Nomad could also diversify into European non-frozen packaged foods categories or in the US frozen category. It has very large markets to look for targets and is armed with an under-levered balance sheet. Nomad Foods’ market share by category can be seen in the following charts. The company has the market potential and balance sheet to consolidate the various categories further.
We see upside of 50% over the following year driven by upside to current consensus estimates, closing the valuation discount to its peers, and another accretive acquisition.