Today, we're taking a look at food stocks. Which companies are worth putting in your cart and which are best left on the shelf? I'm here with John Baumgartner, Mizuho managing director of equity research. Thanks so much for being here.
The stock has had kind of a rockier, but let's get into why you like it here. And let's start with the potential return to volume growth. As we know, a lot of companies in the food sector have had volumes down as prices have gone up.
Nomad priced it at retail. You started seeing volume declines, market share losses to private label. Just in the fourth quarter of 2023, we saw a reinvestment cycle back into the business, more advertising, more in-store promotion. We're seeing brands responding as you can see.
JULIE HYMAN: Yeah.
JOHN BAUMGARTNER: You're seeing fish really inflecting positively-
JULIE HYMAN: So a little bit of bounce up there.
JOHN BAUMGARTNER: --in Q4 and vegetables are also following. So that's not priced into the stock for 2024. We think you will get back to volume growth for the first time in three years. And that should reflect to numbers and the stock.
JULIE HYMAN: Interesting. OK, so let's also talk about multi-year cost savings that you're looking for at this company. How is that kind of feeding through?
JOHN BAUMGARTNER: So Nomad has grown through acquisitions over much of the past decade. And with that, we see opportunities for factory consolidation, increase in capacity utilization, overhead cost savings as well. That's not factored.
We estimate those cost savings could drive over 200 basis points of annual growth, operating profit in each of the next few years. Again, not priced into shares here, which could draw upside as far as 2025.
JULIE HYMAN: And then finally, there is cash return to shareholders too. There's a new dividend coming from this company.
JOHN BAUMGARTNER: Yeah, when you look at Nomad, it's what you think of in a hallmark staple-y food, stock stable growth, 1% to 2% top line, mid-single digit operating profit growth, double-digit EPS growth, has not paid a dividend, has preferred share repurchase over the past four or five years. Just on Monday, we've now seen the first cash dividend being paid at 3% yield. We think that opens up the stock to income-oriented shareholders for the first time that have not been in this name. It trades at eight, eight and a half times profit, 30% discount relative to the food stocks. So we think that will drive upside the numbers as well.
JULIE HYMAN: I mean I have to think of Meta because we keep talking about Meta's new dividend today. But other exciting stuff happening with dividends in smaller companies too. Let's talk about the risk though because obviously there's a lot going on in Europe geopolitically, also consumer pressures and economic pressures. So how much of a concern is that?
JOHN BAUMGARTNER: The largest risk is geopolitics. I mean, this is a European-based name and we had the Russia-Ukraine conflict emerge in 2022. There was a big risk off in European equities.
And given the most of the shareholder base for Nomad is in the US, this stock saw even more pressure. Stock was cut in half between February and October of 2022, still has not fully recovered those losses. So number one would be geopolitics in Europe that would give us caution on the name
JULIE HYMAN: OK, well, let's get to the one that you do not like and this is a stock that's already fallen quite a bit. I'm talking about Beyond Meat here. I think the shares are down more than 60% in the last year.
They came public, what, at 25? Now they're trading below 7. But even with that big drop, you don't like Beyond Meat. And let's talk about why here. First of all, the sales pressure that we've seen on the category overall if you look at the meat category volume.
JOHN BAUMGARTNER: Yeah, I mean we think plant-based meat has been the most disappointing category in the past three years. There was a lot of excitement back at the IPO in 2019, which we thought was excessive at the time. But COVID hit in 2020. You saw the spike in retail sales for the category provided more of a false sense of demand growth for this category overall. Now, you've seen three straight years of volume declines at the high level.
And the problem that we see in this name right now is it's more about limited portfolio. You think about the category, it's mostly ground beef substitutes, sausage substitutes. And 60% of consumers are actually buying plant-based meat for other categories other than beef, whether it's chicken, pork, seafood, even non-meat, pasta, pizza. There's different substitution factors that are here the portfolio is not catering to and we think this is a problem for the category going forward in 2024.
JULIE HYMAN: So that's interesting. You're saying the problem is not plant-based proteins, the problem is that they don't offer enough different types of plant-based proteins.
JOHN BAUMGARTNER: That's right. It's a very, very narrow portfolio right now for the category.
JULIE HYMAN: Interesting. And then there's-- as you say, there's competition and that means that Beyond Meat is going to have to advertise. If you look, for example, at it versus Impossible, there's a clear correlation between competition coming and it losing market share.
JOHN BAUMGARTNER: There is. I mean, the companies now-- it came of age from the IPO cycle of really growth at any cost, focus on the top line. What we're seeing now is a reversion to a reinvestment cycle.
But our concern is advertising will have very low returns because, again, the portfolio is not broad enough to incorporate more households, more consumers. And our concern is even though you're reinvesting back into the business, it's not going to drive an inflection in sales. It's just going to reduce profitability even more.
JULIE HYMAN: And that then brings us to the last point, which is you're concerned about the balance sheet?
JOHN BAUMGARTNER: That's right. Growth at any cost for the first couple of years, the company was even burning over $100 million in cash per quarter in 2021, 2022. They've gone through multiple reductions of costs at this point, but we still think they'll burn $20 to $40 million of cash per quarter in 2024.
They had 220 million in cash in the balance sheet at Q3. So we are concerned is you cut too much, you starve the ability to grow to begin with. So we think there's limits to how much cash burn can improve this year. That being said, we do expect some capital raise before the end of the year, whether it's expensive debt or equity that's very dilutive to shareholders. It's something to watch for negative risk.
JULIE HYMAN: Yeah, all right. What could go right for Beyond Meat? That's a pretty grim picture.
JOHN BAUMGARTNER: Yeah.
JULIE HYMAN: Maybe suddenly we see sales stabilize. What would cause that to happen?
JOHN BAUMGARTNER: Well, I mean, you think, at some point, you just base out in terms of demand and it just stops falling. We don't see signs of that right now. But that would be the biggest opportunity for stabilization for the P&L because the sale stabilized, the cost reduction stabilized, the cash burn stabilizes, and that's where you get a turnaround in sentiment in the numbers. But as I said, for right now, we don't see the makings of that stabilization anytime soon.
JULIE HYMAN: And do you have any position in either of these things?
JOHN BAUMGARTNER: I do not. Do not.
JULIE HYMAN: OK. All right, let's sum it up then, OK? What we're telling investors is buy Nomad Foods for its potential, for a return to volume growth, cost savings as well, a new cash dividend. On the other side, you're saying avoid Beyond Meat for continued sales pressure, costly advertising reinvestments, and liquidity challenges. John, thanks so much.
JOHN BAUMGARTNER: Thanks, Julie.
JULIE HYMAN: Appreciate it. And thank you so much for watching. Good Buy or Goodbye. We'll be bringing you new episodes three times a week at 3:30 PM Eastern.