Ahold Delhaize Stock: shelter from the storm
It shouldn’t come as a big surprise to most that I’m a big grocery investor. More than 15% of my portfolio is exposed to various national and international players in the fields of supermarkets, hypermarkets, food or food-related sectors.
Ahold Delhaize (OTCQX: ADRNY) is a big exposure here, with multiple percentages.
I’ve written about the company before, and in this article I’ll be updating the company’s thesis for recent market moves – my first update on ADRNY in over 3 months.
Update on Ahold Delhaize
I exceeded my targets on Ahold Delhaize a few times this year. The reason for this becomes apparent when you look at what the company is doing, despite the overall investment performance. Since my last article, the decline has been close to that of the S&P 500, which is a poor performance overall.
Am I worried about such a development? Not at all. My grocery and food investments include giants like Nestlé (OTCPK:NSRGY), Axfood (OTCPK:AXFOF), Unilever (UL), Diageo (DEO), Kesko (OTCPK:KKOYF), Europris (OTC:ERPSY ), Kroger (KR) and Carrefour (OTCPK:CRRFY). I’ve held senior positions in virtually every major European listed company, and even some smaller ones like Europris ASA, which most of you have probably never heard of.
Consumer staples serve a very specific purpose in my portfolio, and perhaps in yours. Their goal is never to make you rich or provide those 100-200% RoR in 3-4 years. Their goal is security and in the long term, keep pace with global inflation.
They can do that and let you sleep well at night because grocery companies like Ahold Delhaize never really (or very rarely) go bankrupt. And while Ahold won’t give you 200%, it could well hit 80-90% RoR considering how low things are.
My goals for this business have always been pretty clear – and the business generally runs without any kind of major surprises. This business is one of the best in the world in terms of being prepared to manage cost impacts and inflation. Savings have already been made and the CEO of the company has already planned more than 800 million euros for the year 2022 alone.
While the predictions for 2022 were initially seen as negative or disappointing, they are now presented in a different light as we are 9 months into this year, and it is starting to look very realistic.
Ahold’s recent series of results confirms what the company has seen for the year. The last series of results is that of 2T22/1S22, and these modify the thesis in the following way.
Savings are confirmed. The announced savings program is already absorbing cost increases and introducing more economy product options while expanding the company’s premium store brand options combined with loyalty programs. This kept costs low while keeping options wide.
He also contributed to a 6.1% Increase in sales year-on-year, reaching 21.4 billion euros for the group at constant exchange rates. Driven by real exchange rates, net sales increased by 15%.
These are impressive numbers.
On that revenue, the company has an operating margin of about 4.1%, which is mostly in line with what grocers expect it to be. The business tends to have relatively low margins, with some US companies as low as 2% in margins.
Ahold also adjusted its guidance for 2022E, now expecting single-digit EPS growth from a previously expected decline. Ahold now expects over €2 billion in FCF for the full year.
You may also recall that the company owns Bol.com and sought to take that stake public. Naturally and expertly, the company postponed this action given the current market conditions. My view is that no company, unless forced to, should go public or seek to raise equity in these times. It’s time to fall back and survive – so that’s what we’re trying to do here.
The company’s dividend remains stable as a rock – as with everything with this company, except for the current stock price performance. When I invest in Ahold Delhaize, I never worry about my capital. Sure, the stock price might go down and I might be negative for a while – but my long term is protected by one of the best grocers on the planet. Not exactly high-growing, nor high-yielding – but high-security.
The company now expects to be able to significantly reduce capital expenditures while increasing free cash flow. If this even ends up coming close to the truth, my money would be on massive appreciation once these expected results materialize.
As a reminder from me as well, management has a track record of under-promising and over-performing in terms of financial performance.
It’s a company you shouldn’t bet against, and my PT bump reflects that edge very well. With the drop we’ve seen, it shouldn’t surprise you that I’ve added more in the past few days.
The last thing I want to say in this update is the continuation of positive expectations for this type of grocer. It can drop, it can even be volatile for some reason. But his income is really going nowhere. The company is “too big”, and there is talk of non-optional purchases.
Let me show you the current rating that the company works with.
Ahold Delhaize Valuation
Ahold’s rating is understandably better than it was when I last wrote about the company. Why?
Because expectations are risingwhile the stock price is falling.
Not exactly a complex equation.
What we see in ADRNY is that 2022 is only expected to see a single-digit earnings decline – now close to 6% – which is then followed by single-digit growth. In my opinion, at this multiple, every downside of the business is already taken into account.
Ahold is a global grocer with a BBB trading at a P/E multiple of nearly 11x. This is insane, given that domestic peers are trading closer to 20x, even with the market in its current state. Even calculating Ahold at just a 5-year average P/E of around 14x, the upside for 2024E is now close to 45%, assuming a P/E of 13.84x and a stock price just above above $36.
And this benefit is one that I consider quite probable. Analysts rarely miss here – less than 20% on a 2-year basis with 20% error, and analysts who follow the company are equally positive about the benefits of this business. 20 analysts following the company give the company an average upside of 15% here, with 12 analysts at a “BUY” or “outperform”. Some are on hold, wanting to see how the company’s cost-cutting initiatives really measure up in one of the toughest cost environments in decades.
Me, I’m willing to be a little more positive about this company, because of Ahold’s great track record and security. The business is one of many core grocery investments in my core portfolio.
I previously held a price of 35 €/share for the native share for AD. I’m not moving this PT an inch. The postponement of the BOL IPO is positive for me, but I will not increase my share price because of it. Had the company gone ahead and gone public in this environment, I would have altered my NAV estimates, but for now I’m keeping them.
I see very few, if any, company-specific risks or downsides that are really worth discounting. On the contrary, the company already deals with most of these risks. For its peers, the company moves with comps such as Casino (OTCPK:CGUIF), Tesco (OTCQX:TSCDF) (OTCQX:TSCDY), Jeronimo Martins (OTCPK:JRONF) (OTCPK:JRONY), Sainsbury (OTCQX:JSNSF ) (OTCQX:JSAIY), and others. I still consider AD to be significantly superior to all of these – and that’s why I invest so much in this company, while remaining relatively nimble and lean in all the others, with no shares at all in Sainsbury’s and Tesco.
I’m at a “BUY” here, and my PT remains in this updated thesis.
My thesis for Ahold Delhaize is as follows:
- The company is one of the most attractive food retailers in the EU and US trading at what I consider a significant discount to conservative multiples. This reduction has increased since my last article.
- I keep my PT and stick to my “PURCHASE”. Despite the inflation and SCM issues, I think the company is one of the best in the entire market to stick to during these troubles, and I think 2Q22 is proof of the quality of the business management.
- My PT is €35, and I’m at a “BUY” here. I recently purchased more AD.
Remember, I’m all about:
Buy undervalued companies – even if that undervaluation is slight, and not incredibly massive – at a discount, allowing them to normalize over time and reap capital gains and dividends in the meantime.
If the company goes well beyond normalization and enters overvalued, I reap gains and rotate my position to other undervalued stocks, repeating #1.
If the company does not go into overvaluation, but is at fair value, or goes back down to undervaluation, I buy more if time permits.
I reinvest the proceeds of dividends, labor savings or other cash inflows as specified in point 1.
Here are my criteria and how the company meets them (in italic).
- This company is overall qualitative.
- This company is fundamentally safe/conservative and well run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic advantage based on earnings growth or multiple expansion/reversion.