Asset-Light Model And OWYN Integration Will Support Future Profitability

Key Takeaways

• Acquisitions and product line expansions drive future growth through increased demand and distribution, positively impacting revenue and earnings.
  
• Strategic marketing and asset-light model bolster consumer engagement and investments, aiming for long-term profitability and financial flexibility.
  
• Integration risks from acquiring OWYN and competitive pressures in key segments could challenge Simply Good Foods' revenue growth and profitability.

Catalysts

A consumer-packaged food and beverage company, engages in the development, marketing, and sale of snacks and meal replacements, and other products in North America and internationally.

• The recent acquisition and integration of OWYN is expected to drive significant future revenue growth through increased distribution, velocity, and consumer demand for plant-based nutrition, impacting both revenue and net earnings positively.
  
• The expansion of Quest's product offerings, including adding a second chips manufacturing line and the accelerated launch of Overload bars, positions the company to meet increasing consumer demand which should drive revenue growth and improve margins over time.
  
• Continued innovation and marketing efforts, specifically the It's Basically Cheating campaign for Quest and new advertising for Atkins, are anticipated to stimulate consumer interest and trial, ultimately boosting revenue and possibly enhancing net margins.
  
• Plans to optimize Atkins' ROI by reducing low-yield marketing and trade investments while focusing on innovation may initially impact net sales negatively but are intended to drive long-term profitability and sustainable expansion of net margins.
  
• The company's asset-light business model and strong cash flow support further investments in growth initiatives and strategic acquisitions, potentially enhancing revenue and earnings growth while maintaining financial flexibility.

Simply Good Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Simply Good Foods's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $200.0 million (and earnings per share of $1.96) by about January 2028, up from $139.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, down from 26.4x today. This future PE is greater than the current PE for the US Food industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Simply Good Foods Future Earnings Per Share Growth

Risks

• The acquisition of OWYN presents integration risks and requires significant management focus, potentially impacting the company's overall earnings and margins as synergies are realized.
  
• Increased competition in the bar segment, particularly with new entrants and competitive promotions, could impact Quest's market share and revenue growth in this category.
  
• Supply chain challenges, particularly with chip supply constraints affecting Quest's performance, could lead to stockouts and missed sales opportunities, impacting revenue growth.
  
• Atkins is experiencing a decline in retail takeaway and is undergoing an optimization of trade and marketing investments, which could lead to further revenue declines and pose challenges to its brand recovery and long-term growth.
  
• The anticipated input cost inflation in fiscal 2025 could result in gross margin contraction, adversely affecting profitability and net margins.

Valuation

• The analysts have a consensus price target of $40.5 for Simply Good Foods based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $48.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $200.0 million, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 5.9%.
• Given the current share price of $36.76, the analyst's price target of $40.5 is 9.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.