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I don't like to take risks in the stock market. But when I do, I want the odds to be in my favor. If I am investing in a growth stock, I want to see returns of 15% annually (Double Up In Five Years) When it comes to this company, I believe we have potential for both long-term and short-potential. In this post, I am going to break down everything I know about this company and explain why it is my largest position in my portfolio. Grab your crayons folks and follow along.
Here is a quick run down of Tattooed Chef and what they do. They are a food company selling frozen foods products in the freezer isle at major grocery outlets. Products are plant based to take advantage of vegan, vegetarian, and plant based food trends. While products are sold in the United States, production takes place in Italy. Production costs are much cheaper overseas and allows for higher margins here in the U.S. TTCF is vertically integrated allowing for greater control of product quality and adaptation. It's a new age food company clicking on all cylinders and picking up steam competing against companies of yesteryear.
This company is growing like a BEAST. Here's some of the numbers from 2017 and on.
2017 Revenue ---------------- $32.5 Million
2018 Revenue ---------------- $47.9 Million (+47.4%)
2019 Revenue----------------- $84.9 Million (+77.2%)
2020 Revenue---------------- $148.5 Million (+74.9%)
2021 Revenue (Projected) $239.3 Million (+61.1%)
2022 Revenue (Projected) $323.0 Million (+35.0%)
The growth numbers up top seem impressive right? Well this is a case where just top line revenues do not tell the whole story. TTCF sells "Tattooed Chef" branded products as well as some private label products. What are some of the most valuable assets in the world? Loyal brands. Tattooed Chef realizes this and for the last few years they have been solely focused on its core brand rather than private label deals. Why does Coca Cola dominate the drink space for decades? Because the brand is globally recognized and it's a product people trust. Is TTCF there yet? No. Will it ever get there? Maybe. But so far they are on the right track to do so.
HERE ARE THE GROWTH NUMBERS FOR ONLY TTCF LABELED PRODUCTS
FULL YEAR 2019 - $18.3 Million
FULL YEAR 2020 - $84.6 Million (363% Increase!!!)
2020 3rd Quarter - $22.6 Million (Year-Over-Year Increase of 288%)
2020 4th Quarter - $23.9 Million (Year-Over-Year Increase of 172%)
2021 1st Quarter - $36.0 Million (Year-Over-Year Increase of 105%)
As you can see, branded revenue is what is really important for this company. The CEO himself has publicly stated that private label revenue over time will be 'phased out'. In my opinion, private label revenue is mostly irrelevant with this growth story. While 50%, 60%, and 70% revenue growth may be impressive, the numbers that really matter, (branded products) are growing well over 100% year-over-year.
The CEO and founder of the company (see information below) has had a long history of running food businesses. Before running public companies, the businesses were ran to feed his family and live a prosperous life. So, Tattooed Chef is ran with the intention of being profitable AND growing rapidly. For a company in its early growth stages, this is very rare. Most businesses, regardless of the industry, typically lose money hand over fist. The fast cash burn usually requires companies in these early growth stages to take on debt and issue additional shares. This usually leads to weaker balance sheets and diluted long-term shareholder value. For Tattooed Chef this is not the case. Shareholder dilution is unlikely and debt is unnecessary for the ALREADY profitable business. I doubt long term debt will accumulate unless a large acquisition is made.
So far, TTCF has produced minimal profits. This is mainly due to them reinvesting virtually all profits back into the business for further growth. The chart is more accurate for results from late 2019 and early 2020. The chart is unfortunately skewed heavily in the last few quarters due to a large tax benefit (changing from S corporation to C corporation) and other things such as the recent acquisition. (More on that later. But, as you can see, the company can make money AND grow revenue for their flagship "Tattooed Chef" branded products >100%.
The hardest part of this analysis is trying to determine future profitability. While profits are growing, it is hard to know what type of net income and EPS numbers this company will be doing in 2026. In the chart below, revenue is expected to reach $1.0 Billion annually in 2026. Forecasts this far out can sometimes be a far cry from actual results. But, in this case I believe it is an attainable number by 2026. The big question here is... How much of that will turn into profit?
Food businesses generally have lower margins. Once again, trying to forecast net income for a company like this in 2026 is very difficult. But, we will use an assumption of 10% of revenue turning into net income in 2026. Margins will be higher for TTCF versus competitors such as Tyson Foods (See Below). A Tyson Foods for example, generally turns ~5% into net income. TTCF could make 10% an attainable number in the next five years.
So assuming 10% into net income out of $1.0 Billion in revenue, that means net income would be an assumed $100 Million in 2026. Here are valuation/stock price estimates based on those profitability estimates. The stock currently currently trades at almost exactly $20.00 as of the time of writing at 07/10/2021
Lower End - 2026 PE Ratio of 20 - Market Cap of $2.0 Billion - Stock Price of ~$24.40
The Middle - 2026 PE Ratio of 25 - Market Cap of $2.5 Billion - Stock Price of ~$30.51
Higher End - 2026 PE Ratio of 30 - Market Cap of $3.0 Billion - Stock Price of ~$36.61
The CEO is basically a veteran in regards to the food industry. He seems pretty credible and hard working. Rather than give my personal take on someone's character and ability to perform, it would probably be best to do your own due diligence on the CEO. But, from what I can tell, he seems to be a good leader/founder of the company. His daughter Sarah his literally is "The Tattooed Chef" is the face behind the company. She creates, designs, alters, etc. mostly all of TTCF's products. Here is their website posting information about the two.
Tattooed Chef currently trades at a market cap of $1.65 Billion. For a growth company at this stage, P/S ratio likely a better metric to use in terms of valuation rather than P/E ratio. Here are the numbers for 2021 and 2022.
2021 P/S Ratio - 6.89
2022 P/S Ratio - 5.11
This company is trading at 5 times next years revenue. Considering the growth trajectory moving forward, I would consider this to have considerable value. The company also has $185 Million in cash. Considering this very large cash pile (relative to the company's size) it makes the company's market cap a bit more attractive.
In May of this year, Tattooed Chef announced the acquisition New Mexico Food Distributors, Inc. and Karsten Tortilla Factory. This acquisition was approximately $35 Million. The company still has $185 Million in cash (as of the last earnings report). This leaves lots of room for further expansions and acquisitions.
While only $35 Million was spent, a significant amount of revenue will be generated from this acquisition. "We will be immediately addressing the $1 billion Frozen Mexican Food category once the transactions close. At full capacity, we believe Foods of New Mexico can contribute up to $200 million annually in revenue in the next two to three years and create significant value for all our stakeholders."
$200 Million in annual revenue for only $35 Million? Sounds like a good deal to me.
TTCF is in many large retailers already. Target, Walmart, Sam's Club, Costco, Whole Foods, etc. Many other big names are currently in the work as well. Whole Foods is there most recent big announcement in May of this year with two products being offered. The two products being offered are listed below.
Kroger is the 2nd largest grocer in the U.S. and a deal with Kroger could be MASSIVE for this company. Has a deal been announced yet? Nope. But I have some good news. I am in a discord chat full of other TTCF shareholders. It appears that (while it has not been publicly announced by Tattooed Chef) a soft launch of their products are being sold at a few Kroger locations. Photos and prices can be found listed online in certain areas of Kroger's website. Two different shareholders I have personally spoken to have been able to buy TTCF at Kroger locations. This would obviously be HUGE for TTCF if they are able to get this deal. While it may be unconfirmed for now, it seems to me that very soon a deal is inevitable. Here are some photos I was able to grab off of the Kroger website.
This company is coming out with new products all of the time. It seems like every month new flavors and styles of food are announced. But you may be asking the question and saying... "This is just a food company that sells stuff in the freezer isle. What's the big deal?" Well the company is currently working on expanding past JUST the freezer isle. Plant-based tortillas are currently being talked about. Plant-based snacks are also scheduled to come out late 2021/early 2022. A new executive was just hired a few weeks ago who specializes in the snack industry. In the same way boring old PepsiCo was able to expand into dozens of brands and product styles, TTCF would be able to do the same IF they continue their success.
Remember the massive growth numbers we talked about for "Tattooed Chef" branded products? Well until 2021, the budget for marketing and advertising TTCF products has been $0.00. Until this year, 100% of their growth has been through their own making. NOT with a massive marketing budget. Small TV campaigns and mobile ads are being paid for as of the last few months. More importantly, brand ambassadors/influencers will also be sponsoring TTCF as well. Now that advertising will be impacting the company, I expect brand recognition to steadily increase.
IN THE LAST QUARTERLY CONFERENCE CALL THE CEO STATED THAT TARGET CLAIMED TATTOOED CHEF WAS THE MOST SUCCESSFUL FROZEN FOOD LAUNCH IN THE HISTORY OF TARGET. This is obviously huge for the company. Target is already a big deal for this company and this level of confidence from Target is exciting.
Going over everything on a balance sheet would make this (already long) post even longer. But I have two main things on the balance sheet I would like to point out. Cash as of 03/31/2021 is $185 Million. Meanwhile, long term debt $1.9 Million. The company currently has almost no debt and is cash loaded. Considering this is a company which has $1.65 Billion market cap, $185 Million is a considerable amount of cash. So technically, the valuation of the company is over 10% strictly in cold, hard cash. This is very appealing.
The total addressable market for TTCF is very large. Virtually anyone who eats food (regardless of dietary lifestyle) are potential customers for TTCF. Plant based, vegan, and vegetarian diets are all growing in popularity (See Below). Plant based foods of had 13% compounded annual growth rate from 2017-2019. These numbers are expected to continue for the next decade.
Like all businesses, the company does have many risks. The company is in an extremely competitive market. The food industry will always have big money moving products in and out and competition will continue to be ruthless.
The many retailers TTCF has gotten into could give away the hard earned shelf space. This goes hand and hand with competition risks. If Target, Walmart, Costco, etc. finds a better product, TTCF is at risk of losing the valuable real estate of shelf space.
Sam and Sarah are the backbone of the company. The bulk of shares are owned by them and they are what makes the company the success that it is. If for whatever reason, they were to part ways with the company, it is questionable how successful this business would be.
I believe plant based diets are a trend, not a fad. But, if vegetarian/vegan/plant diets die off in popularity, then Tattooed Chef would likely begin to follow suit as well.
Low margins are kind of the norm for food based businesses. Low margins means less room for error. Profits will likely remain constrained to certain levels for the lifespan of the business.
Inflation has been a big talk in the markets recently and rising costs of raw materials for their products could rise. This could potentially hurt profitability.
Risk free rate of return drives valuation for all equity securities. The risk free rate of return is currently at rock bottom. If this were to change, then stocks with profits that are future oriented would likely see their valuation contract. TTCF falls into this category of valuation contraction.
I own 700 shares of TTCF stock at $17.21 each. (Over half of my net worth)
I own 13 calls at $20 strike for $1.55 each expiring 08/20/2021
I am selling 7 calls against all of my shares at $35 strike expiring 07/16/2021