OWYN Acquisition And Quest Expansion Will Meet Evolving Consumer Demand For High-Protein Foods

Key Takeaways

• The OWYN acquisition and Quest's salty snacks market expansion aim to drive sales growth and improve margins through innovation and increased market reach.
  
• Focus on consumer trends, digital transformation, and brand revitalization supports sustainable revenue growth and improved margins by aligning with market demands.
  
• Supply chain issues, brand distribution losses, and input cost inflation pose significant risks to 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 acquisition of Only What You Need (OWYN) is expected to drive net sales growth through increased distribution, new flavors, and product line extensions. OWYN's integration will lead to more synergies by fiscal 2026, boosting the company's adjusted EBITDA margins.
  
• Quest's expansion into the salty snacks market has potential for early-stage growth, driven by increased production capacity and new product innovation. This is likely to impact revenue positively and scale efficiently due to the company's asset-light model.
  
• The strategic investment in consumer trends, specifically high-protein, low-sugar foods, aligns with increased category relevance and mainstream acceptance. This supports long-term revenue growth by catering to evolving consumer preferences.
  
• The revitalization plan for Atkins focuses on innovation with strong-performing new items and targeted advertising campaigns, which could stabilize and eventually improve the brand's performance and contribute to improving net margins over time.
  
• The company's focus on e-commerce and digital transformation, evidenced by strong online sales growth and advertising strategy, could lead to improved operating margins and revenue through refined targeting and lower distribution costs.

Simply Good Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Simply Good Foods's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $216.3 million (and earnings per share of $2.02) by about March 2028, up from $141.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, down from 23.7x today. This future PE is greater than the current PE for the US Food industry at 17.3x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Simply Good Foods Future Earnings Per Share Growth

Risks

• Supply chain constraints and a temporary underperformance in Quest shipments initially impacted the alignment of shipments and retail takeaway, posing a risk to future revenue predictability.
  
• Atkins brand is expected to face significant declines due to the proactive elimination of low ROI investments and loss of club distribution, which could impact overall revenue growth for Simply Good Foods.
  
• There is reliance on future innovations and new product launches, such as the Quest Overload bar platform, which carries execution and consumer adoption risks that could affect future revenue and earnings.
  
• Gross margins are subject to fluctuations due to commodity price increases, particularly in cocoa and whey, which could impact net margins and make cost management challenging.
  
• The increase in input cost inflation expected throughout fiscal year 2025 may require pricing actions to maintain profitability, potentially affecting consumer demand and overall earnings.

Valuation

• The analysts have a consensus price target of $40.9 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 $47.0, 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 $1.7 billion, earnings will come to $216.3 million, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 6.2%.
• Given the current share price of $33.31, the analyst price target of $40.9 is 18.6% 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.