Investor Essentials Daily

This frozen food products manufacturer is going to be safe in the upcoming recession

Nomad Foods Limited (NOMD)
July 27, 2023

It is difficult to invest amidst a looming recession. Investors seek resilient companies that can protect them against economic turbulence.

Plenty of these investors dive deeper into consumer staples in these times. This is not without a reason, the sector has proved to be stable even during the worst times thanks to the inelastic demand.

The frozen foods industry is one of the places to look at. It has a history of stability and consistent demand during downturns.

That is where Nomad Foods Limited (NOMD) comes in, a leader in the industry and the second-largest fish processor globally.

The market fails to understand how stable and strong the business is, causing undervaluation.

Investor Essentials Daily:
Thursday Tearsheets
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As the global economy braces for a potential downturn, the looming threat of a recession casts a shadow of uncertainty over financial markets.

Signs of an economic slowdown have become increasingly evident. Inflation is still high, interest rates have skyrocketed and the Fed is signaling they may continue to increase rates to cool down the economy.

This prompts investors to seek out companies that have demonstrated resilience during previous periods of financial turbulence.

In times of financial distress, certain sectors tend to fare better than others, offering stability and potential growth opportunities even amidst economic turmoil.

Consumer staples is a classic example. These are companies that are providing essential products to consumers. Customers have to buy these products even when the prices are high and the times are bad.

One industry that has the same dynamics is the frozen foods industry. It has historically protected investors against recessions.

The industry is known for providing essential sustenance to consumers while maintaining consistent demand.

This is where Nomad Foods (NOMD) comes in. It emerges as a standout player, poised to navigate potential economic headwinds and deliver solid returns to investors.

The company has established itself as a prominent player in the frozen foods market, solidifying its position as a leader in Europe.

The company has achieved remarkable stability and success as the second-largest fish processor globally after the industry giant McDonald’s (MCD).

With a robust return on assets (“ROA”) hovering around 40%, Nomad Foods has consistently delivered strong financial performance. It even enjoyed a huge surge in demand during the pandemic that drove the ROA higher to above  60%.

Take a look…

This clearly shows that the company has successfully built a stable business that may even benefit from turbulent times.

And yet, the market doesn’t seem to understand the value the company has as a recession protection.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to fall to nearly 25%, the lowest since it was founded.

While the market has concerns over Nomad Foods’ future ROA due to supply chain disruptions and cost inflation, it is important to consider the company’s operating scale and its potential to mitigate these challenges.

With its established market presence, Nomad Foods possesses the competitive advantage to pass on any increased costs to its customers without significantly affecting sales, thereby safeguarding its profit margins.

The food industry, known for its resilience and consistent consumer demand, further supports the notion that the company has the capacity to maintain its stability in the face of potential economic downturns.

The market’s pessimism about future returns might create an opportunity for investors.

SUMMARY and Nomad Foods Limited Tearsheet

As the Uniform Accounting tearsheet for Nomad Foods Limited (NOMD:USA) highlights, the Uniform P/E trades at 16.5x, which is around the corporate average and its historical P/E of 18.4x.

Average P/Es require average EPS growth to sustain them. In the case of Nomad Foods, the company has recently shown a 50% growth in Uniform EPS.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Nomad Foods’ Wall Street analyst-driven forecast is a 19% EPS shrinkage in 2023 and a 25% EPS growth in 2024.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Nomad Foods’ $18.10 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 4% annually over the next three years. What Wall Street analysts expect for Nomad Foods’ earnings growth is below what the current stock market valuation requires in 2023 but above its 2024 requirement.

Furthermore, the company’s earning power is 7x its long-run corporate average. Moreover, cash flows and cash on hand are 4x its total obligations—including debt maturities, capex maintenance, and dividends. Also, the company’s intrinsic credit risk is 170bps above the risk-free rate.

All in all, this signals average credit risk.

Lastly, Nomad Foods’ Uniform earnings growth is in line with its peer averages and its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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