Nomad Foods Stock Is Estimated To Be Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Nomad Foods (NYSE:NOMD, 30-year Financials) shows every sign of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $27.92 per share and the market cap of $4.9 billion, Nomad Foods stock is estimated to be modestly overvalued. GF Value for Nomad Foods is shown in the chart below.


Nomad Foods Stock Is Estimated To Be Modestly Overvalued
Nomad Foods Stock Is Estimated To Be Modestly Overvalued

Because Nomad Foods is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 7.3% over the past three years and is estimated to grow 1.74% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Nomad Foods has a cash-to-debt ratio of 0.24, which ranks worse than 66% of the companies in the industry of Consumer Packaged Goods. Based on this, GuruFocus ranks Nomad Foods's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Nomad Foods over the past years:

Nomad Foods Stock Is Estimated To Be Modestly Overvalued
Nomad Foods Stock Is Estimated To Be Modestly Overvalued

Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Nomad Foods has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $2.9 billion and earnings of $1.321 a share. Its operating margin is 15.09%, which ranks better than 84% of the companies in the industry of Consumer Packaged Goods. Overall, the profitability of Nomad Foods is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Nomad Foods over the past years:

Nomad Foods Stock Is Estimated To Be Modestly Overvalued
Nomad Foods Stock Is Estimated To Be Modestly Overvalued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Nomad Foods is 7.3%, which ranks better than 68% of the companies in the industry of Consumer Packaged Goods. The 3-year average EBITDA growth is 15.2%, which ranks better than 74% of the companies in the industry of Consumer Packaged Goods.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Nomad Foods's return on invested capital is 6.33, and its cost of capital is 4.01. The historical ROIC vs WACC comparison of Nomad Foods is shown below:

Nomad Foods Stock Is Estimated To Be Modestly Overvalued
Nomad Foods Stock Is Estimated To Be Modestly Overvalued

To conclude, Nomad Foods (NYSE:NOMD, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 74% of the companies in the industry of Consumer Packaged Goods. To learn more about Nomad Foods stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.