By Evie Liu
As consumers opt for healthier eating habits, food companies that play into the trend are primed for growth. Simply Good Foods, which sells low-carb, low-sugar, and high-protein products, has been expanding at a steady clip. Yet the stock price doesn't reflect the company's value -- at a recent $36.47, it's down 8% this year.
If Simply continues to boost sales of its popular products and breathes new life into Atkins, its older weight-management brand that is now out of favor, the stock at these levels will be a buying opportunity.
The health and wellness trend in the food industry is no longer just focused on eliminating bad things like trans fat, sugar, and artificial colors from diets. Consumers now are looking for added nutrition, and high-protein products are high on the list.
Quest Nutrition, a brand Simply acquired in 2019, sells traditional protein products like shakes, powders, and bars, but it has also been successful with high-protein snacks such as tortilla chips and cookies. The brand has expanded at high-single to double-digit annual rates and now makes up over half of Simply's sales.
In June, Simply also acquired Only What You Need, a small brand that sells plant-based protein shakes. The company expects OWYN sales to reach as much as $145 million in fiscal 2025, about 10% of its total revenue and up 20% from 2024.
The brands don't necessarily have to take market share from rivals. Retail sales for these "active nutrition" products have been increasing at a high-single-digit rate for years and surpassed $20 billion in 2023, according to Mizuho analyst John Baumgartner.
He expects the annual growth rate for the group to remain in that range for the next five years, as these products enter the mainstream and become a daily staple rather than a discretionary purchase.
"They're no longer just for bodybuilders, and no longer just in the vitamin shops. They're now available at Target and most grocery stores," says Baumgartner. "We're most bullish on this category across anything in the food and staples industry."
There is also a lot of research -- from private companies and universities -- on ingredients that can benefit the human body, such as lactoferrin, which boosts iron absorption, and proteins that help control glucose. This could result in innovative new products, lifting growth in the coming years. "It isn't just marketing; there is actual science backing this stuff up," says Baumgartner.
Despite the positive outlook, Simply's stock is undervalued. Shares have tumbled 18% since peaking in April 2022, although the company's top-line sales grew 20% during the same period.
The main reason for the lagging performance is Simply's legacy brand Atkins, known for weight-management products including frozen meals, shakes, bars, and snacks. Sales for Atkins have declined in the past few years as the brand struggles to compete in an increasingly crowded market.
While Quest appeals to younger consumers with active lifestyles, Atkins' devotees skew toward middle-age people looking to lose weight. That customer base is shrinking.
"The brand is still associated with the Atkins diet, and the word 'diet' itself has kind of become a no-no word," says Stephens analyst Jim Salera. "They need to revitalize the brand and change the messaging on it."
CEO Geoff Tanner came aboard last year to turn Atkins around, and the company has been rolling out new products such as wafer bars, gummy bears, and truffles, and it upgraded the packaging for its Atkins Strong protein shake. Still, it takes time to change brand perception. In the latest quarter, Atkins sales slid 5% from a year ago.
"There is a great deal of focus and emphasis on revitalizing this brand, but it has proven to be a longer process than initially expected," says Connor Rattigan, an analyst at research company Consumer Edge.
In its latest earnings release, Simply said that it will focus on improving the return on investment of Atkins in fiscal 2025. This could affect the brand's net sales, but management believes it's necessary to ensure that the brand remains a sustainable and profitable business over the long term.
If Atkins starts growing again, investors could be rewarded. Simply trades at a much cheaper valuation than rival BellRing Brands, although they are both major players in the nutrition space.
Investors like BellRing since it's a purer play on protein shakes, which make up 85% of the company's revenue -- and there has been a shift in demand from protein bars to shakes, as the latter is used as a convenient meal replacement. BellRing shares have rallied over 180% in the past two years.
But BellRing stock may be too expensive, and Simply is a cheaper alternative for investors. Simply's stock trades at 19 times forward earnings and 2.4 times forward sales, according to FactSet. That is much lower than BellRing's 33 times and four times, respectively.
Simply stock is now at the lowest valuation since its initial public listing in 2017, similar to levels during the pandemic selloff in 2020. "There's an excessive short-term negativity that has created a value disconnect between BellRing and Simply Good Foods," says Baumgartner. "It's kind of a value stock in the nutrition space."
Write to Evie Liu at evie.liu@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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November 14, 2024 02:00 ET (07:00 GMT)
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