Nomad Foods (NOMD), is a boring company with some interesting growth catalysts.
The company produces and distributes frozen foods throughout Europe.
We are Neutral on Nomad Foods. (See Analysts’ Top Stocks on TipRanks)
The European Frozen Food Packaging Market was valued at $52.6 billion in 2020, and is expected to grow at a CAGR of 6% between 2021-2026. Although this figure does not sound very exciting, it demonstrates that the industry is healthy and still growing. There are a few factors driving the industry’s overall growth.
To begin with, people’s lifestyles are changing to meet the demands of their hectic work and life schedules. As a result, more consumers are gravitating towards products that offer convenience.
This is especially true for the millennial generation, which has a preference for single-serving and on-the-go food products. The demand for packaged foods is also increasing among developing countries that are experiencing rapid urbanization. This is primarily driven by the increase in disposable income among the middle class.
Innovation within the industry is another growth driver. Packaging technologies have been developed to increase the shelf life of products. Products can be shipped to further regions, while also producing less waste. Therefore, there is growing demand from retailers to carry packed foods in their stores.
The growth of the industry provides Nomad with a tailwind for growth. If the company can simply maintain its market share, it should grow at a similar pace to the industry. Nonetheless, the company actively looks for ways to boost growth.
One way Nomad tries to achieve this is by acquiring smaller players. Although the company has made large acquisitions occasionally, it tends to acquire responsibly for the most part.
By responsibly, we mean it keeps the amount spent on acquisitions below its free cash flow, thus, preventing it from overleveraging. Currently, it has a net debt-to-EBITDA ratio of just under three, which we don’t see as concerning.
In addition, the company has been aggressively buying back shares recently thanks to its strong free cash flow. It reduced its share count from 194 million shares outstanding at the end of 2020, to 177.8 million in its most recent quarter.
Furthermore, Nomad announced a new buyback plan valued at $500 million that would reduce its share count by approximately 10% at current prices.
This means that earnings per share will increase even if earnings stay flat. The increased EPS leads to a higher share price even if the P/E ratio were to stay the same.
Wall Street’s Take
Turning to Wall Street, Nomad has a Strong Buy consensus rating, based on four Buys assigned in the past three months. The average Nomad price target of $34.33 implies 23.7% upside potential.
Nomad is a boring company that doesn’t get much attention. However, it is fundamentally solid and well-positioned for future growth.
Its disciplined approach to acquisitions leaves money available to reward shareholders through buybacks.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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