Is The Simply Good Food Company A Simply Good Investment?

The Simply Good Food Company Is A Small-Cap Growth Opportunity

The Simply Good Food Company (NASDAQ:SMPL) reported a fantastic 4th quarter and full-year 2020 with one caveat. The results are driven more by acquisition than core strength but that may not matter. With earnings and revenue projected to grow double digits in fiscal 2021 the stock is setting up a nice entry opportunity.

The outlook for the next fiscal year is EPS growth in the range of 10% to 12% and that estimate is likely too low. Of the 13 analysts rating the stock, they’re all buyers and getting more bullish as time goes by. The most recent analyst to speak out is at Morgan Stanley. They initiated coverage with a strong buy and set their target at $26 or just shy of the consensus.

The high-price target is $34 but take that with a grain of salt. That target was set by Goldman Sachs way back in February before the bottom fell out of the economy. Regardless, the consensus target is more than a 33% upside from recent price action. The high-price target that matters was set by Wells Fargo in July, $30 or 50% upside.

A Simply Mixed Quarter For The Simply Good Food Company

The Simply Good Food Company posted a great fiscal 4th quarter but there is a mitigating factor to be aware of. So, while the 59.7% growth posted for the quarter looks great (and it is, don’t get me wrong) it is not as great as it could be.

Breaking things down on a segment basis the legacy Atkins business saw its revenue fall -8.0% which means all the growth and more was produced by Quest. The mitigating factor is that last year’s 4th quarter had a 13th-week that, when adjusted, makes this year’s revenue flat versus down. On a sequential basis, revenue in the legacy Atkins business is rebounding strongly.

“In an incredibly challenging, dynamic year, we executed well against our core business initiatives, gained market share in the nutritional snacking category and completed the acquisition of Quest as well as the majority of the integration,” said Joseph E. Scalzo, President and Chief Executive Officer of Simply Good Foods. “Key milestones achieved during the year included a new organization structure, implementation of a new ERP platform and realization of cost synergies in-line with our targets.”

As for Quest, revenue in the newly acquired segment is estimated up mid-single-digits from last year which helped to boost the net results. On a net basis, the revenue of $222.29 million beat the consensus by 790 basis points. Notably, management says results are underpinned by eCommerce channels, a little detail that does not surprise me.

Moving down to the bottom line, earnings are mixed as well. The GAAP earnings of $0.12 missed by $0.03 while adjusted EPS of $0.20 beat by $0.04. Looking forward, the company is offering guidance for the first half of fiscal 2021. The bad news is the $425 to $435 million in projected revenue is less than half the full-year consensus which raises some doubts about next year’s growth. The caveat is that this company tends to earn more in the back half of its year when the weather gets warmer and people start exercising more.\

The Technical Outlook: The Simply Good Food Company Might Be Hitting Bottom

Shares of The Simply Good Food Company are down more than -5.0% after the 4th quarter report and look like they might go lower. The risk for bears is that price action is still above a key support target and the indicators are not as bearish as they could be. While MACD is showing a clear bearish crossover momentum is weak and stochastic is more consistent with a bottom and entry signal than it is lower prices. The next few days will tell the tale, I am sure. If price action falls below the $20 level we may see them pull back all the way to $16. If not, if support holds at $20 a move back up to the recent highs near $24 is likely.