SMPL is entirely reliant on its three brands for sales. The first brand is Atkins, from which SMPL derives around 30% of revenue, primarily through products for consumers following a low-carbohydrate lifestyle or seeking to manage weight or blood sugar levels. The second brand is Quest, from which SMPL derives roughly 60% of its revenue, and targets consumers seeking a variety of protein-rich foods and beverages that also limit sugars and simple carbohydrates. The third brand, OWYN, acquired in June 2024, primarily caters to consumers seeking plant-based, protein-rich beverages that are tested for the top nine allergens and limit sugars and simple carbohydrates.
Growth in wellness industry
The investment case for the company, and the key business direction, is that SMPL is poised to expand its platform in the wellness industry through innovation, enjoy organic growth in the nutritional snacking space, and continue to expand its market footprint by seeking acquisition opportunities.
Year to date, SMPL’s share price has fallen almost 40%, mainly due to macroeconomic headwinds and weakened demand for its Atkins brand, which has not shown significant improvements or growth over the past few periods. The macroeconomic factors that negatively impacted the price include key ingredient inflation, supply chain challenges and the effect of tariffs.
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The key question investors should ask is: Does the current trading price reflect the true or fair value of the company, assuming that it is a decent company quantitatively? Additionally, what measures has the company taken to enhance the value of SMPL, or at the very least, maintain its current value? If these questions can be answered with proper justification or evidence, then the share price drop may be an excellent opportunity for investors to pick up an undervalued stock.
To do this, we can study the company’s most recent 3QFY2025 financial results. Although the net sales of Atkins fell 13.2% q-o-q, the other brands more than offset this loss by growing 11.1% and 24.4% for Quest and OWYN, respectively. It is important to note that less than a third of the revenue is derived from the underperforming Atkins segment.
The main reason for Atkins’ underperformance is the decline from previously announced distribution losses and the inability to repeat significant volume-driving merchandising events from multiple periods ago. To address this, the company is continuing to optimise its brand assortment, with the primary goal of achieving a more focused and sustainable business. If Atkins can become a sustainable part of the business, the other brands can focus on growth. Other efforts to ensure Atkins’ recovery include a new website, advertisements, and, more importantly, innovation. This innovation targets the growing need for science-based products to support consumers’ weight loss journeys, particularly those using or transitioning off GLP-1 drugs like Ozempic.
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Quest performed decently for the quarter, primarily due to an increase in salty snack consumption. Although the outlook is only expected to increase in the low double digits over the next period, SMPL’s management is continuously putting effort into growing this brand to ensure a multi-year runway for growth, such as through innovation, expansion of physical availability and increasing brand awareness.
OWYN’s brand reported promising results for the quarter and is expected to perform well over the next few quarters. Although this brand only contributes roughly 10% of SMPL’s revenue, the consumption of OWYN’s niche, which is protein-rich and plant-based beverages, is expected to grow at a healthy rate, relative to the company’s other two brands. Also, given that this brand was acquired recently, it is expected to deliver synergies by the end of the next fiscal year.
In essence, both Quest and OWYN are expected to drive strong revenue and earnings growth. Qualitatively, understanding key trends in consumer habits is essential for companies in the F&B business, such as SMPL. SMPL is actively innovating and researching ways to capitalise on the shift in these habits, such as mainstreaming its high-protein, low-sugar and low-carb foods, which continue to gain momentum in the nutritional snacking market.
Weathering seasonal headwinds
In terms of financials, SMPL has had very consistent annual results from its listing back in July 2016. Chart 1 shows the positive and growing revenue, net income, operating cash flow and free cash flow of the company from 2017 to the present. These financials collectively represent the value of the company and are further supported by SMPL’s margin and profitability ratios shown in Chart 2. Specifically, this indicates that SMPL has and can weather seasonal headwinds and negative industry outlooks, and that the price drop needs further scrutiny, if any, to accurately reflect the company’s fair value over the medium to longer term.
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The company’s financial health is excellent, both in terms of short-term liquidity and longer-term solvency. For its liquidity, SMPL has a quick ratio and current ratio of 2.3 times and 4.0 times, respectively, well above the benchmark of 1 time. Also, the company has a net debt to equity ratio of 11.2%. Although the company is not net cash, its interest coverage ratio of 12 times is well above the benchmark of two times, implying that financial distress is an unlikely concern. This is further supported by the company’s Altman Z-score of 10.2 times, which is significantly above the benchmark of three times. Overall, the company is financially healthy, with its debt also rated investment-grade and carrying a very low probability of default.
In terms of relative valuation, SMPL trades cheaply compared to domestic peers, by trading at a significant 22%, 11% and 51% discount for its forward P/E, forward EV/Ebitda and forward P/B ratio, respectively. Regionally, the company trades at a 20%, 8% and 51% discount for the same metrics, respectively. This indicates that SMPL is an attractive pickup compared to its industry peers, based on forward or expected price multiples rather than historical ones.
Sentiment-wise, there are seven “buy” calls, six “hold” calls and one “sell” call for Simply Good Foods from analysts over the next 12 months, with an average target price of over 50% above its current trading price of US$24.12 ($31.32). Based on a methodology that includes multiple types of valuations (see Charts 3a & 3b), the intrinsic value of the company is US$31.34, which is 30% above its current trading price.
The company will report its results one week after this article is published. This could be the trigger for its recovery towards the computed intrinsic value. Given that this is a mid-cap US stock listed on the Nasdaq, Singapore investors may purchase this stock through their international trading account from most available investment brokers.
Disclaimer: This article is strictly for information purposes only and does not constitute a recommendation or solicitation, or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. Any personal investments should be made at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk. The author of this article does NOT hold or own any stock(s) featured in this article or have a vested interest in it at the time of writing
