Research Notes: More Ozempic Updates
Weight loss drugs are changing the narrative for these stocks
We cover past ideas affected by the rise of GLP-1 drugs — starting with a name we liked at a higher price eight months ago.
SENEA has posted a huge rally, but the deep value play remains.
The potential for GLP-1s to mitigate sleep apnea looks like a clear risk for QIPT.
DXLG and AMBP have very different exposures — but still-solid bull cases.
Over the last two weeks, we’ve taken a look at the impact of GLP-1 agonists such as Ozempic on the market, and on individual stocks. This week, we’ll stick with the theme — and start with a name we liked in March that we still like eight months later.
Nomad Foods Looks Like A Buy On The Dip
When we recommended U.K. frozen food manufacturer Nomad Foods NOMD 0.00%↑, we noted the underperformance of the stock against U.S. peers during 2022. U.S. food manufacturers posted huge gains last year, but European names were left behind:
2023 has been a very different story for U.S. players. It’s possible GLP-1 drugs are playing some role, but as we argued two weeks ago there are plenty of other reasons (interest rates, valuation, secular changes) why those names have pulled back.
But whatever the cause of sector weakness, NOMD hasn’t benefited from the same mean reversion:
That’s despite the fact that Nomad continues to perform well. Full-year adjusted earnings per share guidance has been raised after each of the first two quarters, and was reiterated ahead of a conference in September. Nomad expects mid-single-digit revenue growth on an organic basis, decent performance in a difficult European environment.
Admittedly, there are some concerns. Volumes were down “high single digits” in the second quarter. Nomad’s pricing increased “mid-teens”. Concerns about the macroeconomic situation on the Continent — which is clearly worse than the U.S. in terms of both growth and inflation — have weighed on the stock.
That said, it’s important to take a step back and understand just how dramatically volatile the external environment is, and has been. Nomad has dealt with Brexit, COVID, inflation, Ukraine, and many other factors. Yet, at least until 2023, earnings per share has grown at a double-digit clip.
Guidance for this year, now at €1.54 to €1.57 against €1.66 last year, suggests that trend will end in 2023. But spending behind advertising and promotions should boost volumes in the second half and into next year, and as management noted at the September conference, inflation is moderating and consumer behavior is normalizing.
Meanwhile, even with a recent bounce NOMD now trades at less than 10x 2023 free cash flow and 8.7x the midpoint of EPS guidance. At that conference, chief executive officer Stéfan Descheemaeker was asked if Nomad (a historically acquisitive company that has done well trading its own stock) was interested in making more deals. He responded that, at NOMD’s valuation, there simply weren’t M&A targets that would provide more value than buying back his company’s stock. NOMD is down another 14% since then.
It’s possible that expansion of GLP-1s in Europe curbs demand for products like frozen pizza or even fish sticks. That can matter. Two weeks ago, we discussed the significant margin and fair value impacts that “super consumers” can have for food manufacturers.
But there’s also a large portion of the portfolio that leans toward the healthy side, and at this valuation any broader risks seem worth taking. The declines in U.S. food manufacturers make some sense. The continued weakness in NOMD looks like an opportunity.
Seneca Foods Still Looks Like A Deep Value Buy
Broadly speaking, one of the reasons for the reversal in U.S. food manufacturers has been investor attitudes toward pricing. In 2022, those manufacturers took significant price — often above 10% — but volumes held up regardless. In 2023, the story has been different: consumers clearly are feeling the pressure, and trading down from branded and/or high-priced products.
In theory, this should be a benefit for Seneca Foods SENEA 0.00%↑, the largest canned vegetable manufacturer in the U.S. with a significant private label business (nearly half of total revenue). In fiscal Q1 (calendar Q2), that wasn’t quite the case, but it was close. Figures from the 10-Q suggest volumes fell less than 3%, a better performance than majors (both General Mills GIS 0.00%↑ and Campbell Soup CPB 0.00%↑ saw 5% declines in their most recent quarters).
At the least, Seneca shouldn’t be seeing quite the pressure branded players face headed in 2024. And, for now, the market has priced in that outlook: SENEA is up 54% since we called it a buy back in late July, with steady gains of late after a V-shaped recovery from the lows: