Investors looking for an undervalued defensive stock can look no further than
Simply Good Foods (NASDAQ:SMPL). The mid-cap maker of nutritional bars, shakes, and snacks looks like a bargain at present levels given its exposure to some of the
biggest long-term trends in consumer eating. Let's take a look at the company's recent performance, long-run opportunities, and valuation.
How has Simply Good Foods Performed During the Pandemic?
Simply Good Foods main brands, Atkins and Quest, cater to the weight management and active lifestyle segments of the healthy nutrition industry. With people making fewer public appearances these days, many have let weight loss and healthy eating habits fall by the wayside—and this has impacted Simply Goods recent performance.
The company's recent fiscal fourth-quarter report was a tale of two products. Sales were up 60% to $222.3 million driven by 68% growth in the recently acquired Quest. Retail demand for Quest protein bars rebounded and sales of Quest cookies and chips were up 95% and 72%, respectively.
The legacy Atkins business didn't fare as well as sales declined 8%. This makes sense when you consider the pandemic has been more conducive to the couch potato lifestyle. But a positive read in the Atkins segment was that sales of Atkins confections increased 17%. People have been less willing to fully commit to the Atkins way but more apt to stock up on all things snacks.
Both the sales and profit figures exceeded the Street's expectations. Yet Simply Good's stock fell 5% on a major down day in the market. Amid the stale investor sentiment, the market chose to zero in on the company's Q4 adjusted EBITDA margin which fell from 17.3% to 16.7% year-over-year. For the full year though, the EBITDA margin was relatively flat at around 19% despite the unusual operating environment.
What Trends Favor Simply Good Foods?
Trends in both Quest and Atkins improved from the previous quarter in Q4 as the economy reopened and COVID restrictions eased. This is more indicative of Simply Good's potential because it depends significantly on 'away from home' and 'on-the-go' consumption. Simply Good estimates that 40% of its product consumption occurs outside the home.
So, with many people working from home and not leading their usual fast-paced lifestyles, there have been fewer reasons to reach for convenient nutrition bars, ready-to-drink (RTD) shakes, and healthy snacks. Despite these challenges, Simply Good Foods was able to increase its market share in the total nutritional snacking category as well as the active nutrition and weight management subsegments in Q4.
Meanwhile, continued momentum in the e-commerce channel is another positive underlying trend. It's no secret that food manufacturers with a viable online presence will do well in this environment and Simply Good's online storefront is gathering steam.
But while the recent performance has been largely driven by snack sales, ultimately Simply Good's core business will have to be the primary growth driver. This is because nutrition bars and RTD shakes account for roughly three-fourths of sales. And that will mean economic conditions will have to normalize such that the pre-COVID trends of on-the-go eating and weight loss return.
What is Simply Good Foods' Growth Strategy?
Appropriately, Simply Good Foods is focused on becoming a leaner company. It recently divested its underperforming Simply Protein brand for which it incurred a $3 million impairment charge last quarter. It is also exiting the European market where it has struggled to gain traction.
Today, Simply Good holds two of the most popular brands in the nutritional foods industry in Atkins and Quest. Along with an up and coming snacks business, it has exposure to the growing 'better for you' and 'on-the-go' meal replacement and snacks markets which were humming along well pre-pandemic.
It's unlikely these trends will fade in the post-pandemic economy. They are more likely to accelerate alongside increased consumer interest in healthy living and immunity building. And with many people returning to gyms in recent months, the weight loss component of the business should start to rebound.
Meanwhile, Simply Good is not simply waiting around for people to return to their active lifestyles. Its new "Eat Right, Not Less" marketing campaign featuring Rob Lowe is focused on at-home consumption. It promotes the value of Simply Good products as healthier alternatives to other at-home snacks. It also targets those who want to shed their 'pandemic 15' and improve their immune system with the vitamins and minerals in RTD shakes as they work from home.
The ongoing integration of Quest Nutrition should also help long-term bottom line performance. Management has noted it is on track to achieve its $20 million synergy target by the end of 2022.
Is Simply Good Foods Stock a Good Value?
In terms of valuation, Simply Good Foods is trading at 12.5x trailing adjusted EBITDA and 22x trailing adjusted earnings. Both are compelling valuations for a clear leader in the nutritional snack and meal replacement category.
Sell-side analysts also seem to think Simply Good Foods is a good deal at current levels. All 10 analysts have 'buy' ratings on the $20 stock with price targets ranging from $26 to $34.
Hedge funds have also been snacking on Simply Good Foods. They increased their holdings in the stock by 419,000 shares in Q2 including a $3.6 million position taken by well regarded hedge fund manager Richard Chilton.
Despite the tough operating environment, there's a lot to like about Simply Good Foods' recent performance. The company is generating strong cash flow which will be supportive of future growth and help it pay down debt. Management is forecasting its net debt to adjusted EBITDA leverage ratio will decrease to well below 3x by the end of the current fiscal year.
While plenty of uncertainty remains around the impact of the pandemic on consumer shopping behavior, Simply Good Foods appears to have a favorable risk-reward profile here. The undervalued stock should be a beneficiary of lasting health and wellness trends regardless of how they evolve in the years ahead.
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