Reviewed on Sep 4, 2023. Price at publication: $4.05.
tldr: MAMA is early in its growth cycle and shows signs of a multi-bagger. But, given the recent run-up in stock price, there maybe better entry-points for investors seeking margin of safety.
Mama’s Creations ($MAMA) produces a range of all-natural, refrigerated foods that are available at retailers nationwide. Their main offerings include beef and turkey meatballs, meatloaf, chicken, sausage-related products, and pasta entrees. Catering to health-conscious consumers, Mama’s products avoid artificial flavors, synthetic colors, and preservatives commonly found in conventional packaged foods.
The company received approval from the United States Department of Agriculture (USDA) and the Food Safety and Inspection Service (FSIS) for its “all-natural” label claims. The company primarily sells its products, including more than 50 offerings in beef, chicken, salad, and olive portfolios, to supermarkets, club chains, and mass-market retailers. These products are mainly found in the deli, fresh meat, and foods-to-go sections. Additionally, Mama’s Creations sells its range through QVC, a major direct-to-consumer marketer.
Business Quality
Revenues in 2022 grew at 60% YoY with the 5Y average at ~30%. The business continues to demonstrate strong execution in delivering top-line growth while maintaining a EBITDA margin of ~11%. Margins seem to be improving in recent quarters and the company seems laser focused on profitability.
Such businesses typically require effective consistent execution from management. Food & Beverage industry is highly competitive and fragmented where execution and key acquisitions matter. If the company does not focus on operational efficiency and continue to drive down costs, margin expansion becomes increasingly challenging. These products typically don’t have pricing power considering other options in the fresh food aisle.
Competition and Industry Outlook
Customers are increasingly time and budget constrained. Shifting habits are driving consumers to the perimeter of the store where fresh, prepared foods are stocked. Perimeter shopping is consistently growing ~8-10% per year.
Based on their company presentation, in the past two years:
- 93% of grocers have seen an increase in demand for fresh food; and
- 84% of grocers have expanded their fresh department offerings.
The deli section, worth $40 billion, is among the fastest-growing departments in these stores, with many grocers adopting restaurant-style grab-and-go models. Prepared deli foods, the category in which the company operates, represent a $20 billion market. This sector has experienced over 20% growth in the last 52 weeks, outpacing the overall food and beverage industry.
While it is difficult to build a durable moat around such products, the fragmentation in the prepared deli segment could present an opportunity for a single player to create a differentiated offering or consolidate all the brands. The company continues to innovate with new offerings like “Meal For One” and “Meatballs in a Cup”. Its strengths lie in its authentic Italian recipes which have cultivated customer loyalty and consistently received positive reviews for taste and quality. It emphasizes health and convenience, offering products made from high-quality natural ingredients that can be prepared in under 12 minutes. MAMA also aims for affordability, with most products priced between $5.99 and $9.99, and the portion sizes offer good value for the cost.
Cash Flow Safety
MAMA been free cashflow positive in recent quarters, but not enough to show a consistent growth trend. Net income dropped from a gain of ~$4M in 2021 to a net loss of 250K in 2022 as a result of gross profit margins shrinking from 31% to 25%, one-time acquisition costs and tax accounting. While management continues to lay out a plan for margin expansion, it is difficult to predict future cash flows for this company.
While its cash flow growth mainly stems from organic growth, it is trying to gain distribution and expand its product offering through acquisitions. It recently acquired T&L Creative Salads and Olive Branch, both New York-based gourmet food manufacturers. These acquisitions have enabled the company to broaden its national retail presence, adding high-quality protein, salad, and olive products to its offering. Furthermore, in June 2022, Mama’s Creations acquired a 24% minority stake in CIF, a company involved in the prepared foods sector.
Valuation
Typically, I tend to focus on EV/EBIT (TTM) since it accounts for debt. For company’s like MAMA where funds are needed for expansion and scaling, it is prudent to keep an eye on the balance sheet and debt levels. At the time of publication, we are looking at an EV/EBIT of 35 and a P/CF (TTM) at ~18. There are no major increases in outstanding share counts to suggest that shareholders are getting materially diluted. The steady modest increases seem to be the result of exercise of outstanding stock options.
The company is certainly not cheap by any measure. The recent run-up in price leaves no margin of safety. But, something to consider here is that you can’t value MAMA using the same yardstick as more mature peers. The company is delivering impressive top line growth and clearly seems to be pretty early in its growth phase with rapid expansion ahead. It could turn out to be on of those multi-baggers where the entry point is not as consequential.
Conclusion
The company continues to demonstrate impressive revenue growth. Management seems experienced and making good acquisitions to gain better distribution. It is also operating in a fast-growing F&B segment. The company has generated loyal customers in a space where consumers preferences continue to shift in favor of their product offerings. However, a lot of that growth is already being priced in, which eats into potential returns. Given the volatility in this micro-cap, there maybe better entry points when the optimism fades as a result of a bad quarter or two of execution.
