Focused Investments Will Strengthen Future Market Share In Poultry And Potatoes

Key Takeaways

• Focused growth in advertising, innovation, and merchandising aims to increase revenue and boost market share in key categories.
  
• Operational efficiencies and cost initiatives contribute to expanded margins and support reinvestment and shareholder returns.
  
• Challenges in supply chain efficiency, inflation, advertising costs, and execution in new markets may threaten Nomad Foods' margins and revenue growth.

Catalysts

Manufactures, markets, and distributes a range of frozen food products in the United Kingdom and internationally.

• Nomad Foods is focused on maintaining strong organic growth through increased investment in advertising, innovation, and in-store merchandising, which is expected to drive volume growth and enhance revenue.
  
• The company has streamlined its operations and increased efficiencies, resulting in expanded gross margins, which should positively impact net margins.
  
• Continuous elevation of its growth platforms, such as poultry and potatoes, into Must Win Battles, is aimed at driving category leadership, thereby increasing revenue and boosting market share.
  
• The ongoing productivity initiatives across the supply chain ensure cost efficiencies are realized, allowing for reinvestment into the business and contributing to earnings growth.
  
• Nomad Foods is committed to shareholder returns, highlighted by buybacks and a 13% dividend increase, which supports earnings per share (EPS) growth.

Nomad Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nomad Foods's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 9.1% in 3 years time.
• Analysts expect earnings to reach €303.0 million (and earnings per share of €2.28) by about March 2028, up from €227.1 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 11.8x on those 2028 earnings, down from 12.1x today. This future PE is lower than the current PE for the US Food industry at 17.3x.
• Analysts expect the number of shares outstanding to decline by 5.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

Nomad Foods Future Earnings Per Share Growth

Risks

• The company's reliance on maintaining efficiency gains and productivity improvements in its supply chain may present challenges. If these efficiencies are not realized, it could impact Nomad Foods' gross margins and overall profitability.
  
• The potential for new inflationary pressures and the need to take pricing actions could impact consumer demand. If Nomad cannot pass these costs onto consumers or if it leads to reduced volumes, it could negatively affect revenue growth.
  
• The need for an increased advertising spend that continually outpaces sales growth could pressure net margins if sales growth does not meet expectations.
  
• The reliance on Must Win Battles and growth in new markets requires strong execution. Missteps in these strategies could lead to market share erosion and affect revenue growth negatively.
  
• Uncertainties regarding supply chain disruptions, such as those previously encountered with ERP implementation, may affect business operations and financial performance, potentially hindering revenue and net margin improvement.

Valuation

• The analysts have a consensus price target of $25.054 for Nomad 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 $28.11, and the most bearish reporting a price target of just $22.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.3 billion, earnings will come to €303.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of $19.66, the analyst price target of $25.05 is 21.5% 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.