MamaMancini Stock: Worth Keeping An Eye On, But Not Buying (NASDAQ:MMMB)

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MamaMancini’s Holding (MMMB) is a New Jersey company that manufactures all-natural meatballs following an Italian recipe.

The company has been growing at tremendous rates, 22% yearly average for revenue since 2013. In 2018 MMMB also became profitable.

Because of its growth the company has attracted a lot of attention and it is currently trading at high multiples, 23x expected earnings.

In this article we try to analyze the future growth prospects of MamaMancini. We believe that 23x is too much for MMMB but that the company is still a must follow for conservative growth investors.

Note: Unless otherwise stated, all information has been obtained from MMMB’s filings with the SEC and MMMB’s investor relations website.

MMMB’s secret recipe for growth

MamaMancini’s value proposition is natural good tasting Italian recipes, mostly protein based, to be served as fresh as possible, for a modest price.

Natural because all of MMMB’s products have all-natural certification from the FDA and the FSIS meaning they have no artificial, colorant or preservative ingredients. With these certifications they can use the “natural” label on their products.

Good tasting because the company is very proud of the quality their products have. According to data provided by MMMB on its September 2021 investors presentation, 85% of users are willing to buy the product again.

Protein based because MamaMancini’s products have the least fat and the highest protein content compared to other meatball manufacturers’ products. Of course, this is only compared with other meatballs, not with other food sources.

Served fresh because although MMMB sells frozen products, it is trying to direct its marketing efforts towards the fresh side of the supermarkets (hot bars, salad bars, fresh section) and to the food services segment (universities, restaurants, hotels, etc.).

Finally, a modest price, meaning that MMMB’s was trying to position its products in the middle between premium products offered in the fresh sections and cheaper products with lower quality ingredients. Typical retail prices for 16 oz. packages ranges from $4.99 to $7.99, and $5.99 to $9.99 for bulk products sold in delis or hot bars.

This proposition has worked out well for MMMB with expansion in supermarkets, discount clubs and regional stores. As the chart below shows, although there are some chains with zero or low penetration, others have been completely penetrated. This means that the product is successful when introduced into a particular market.

MMMB

MMMB’s supermarket market penetration chart

MMMB’s investors presentation September 2021

The company also has a very clean balance sheet: almost zero debt up to the last reported quarter and almost $10 million in current assets. The reasons for this are two. First, growth has not meant expansion yet and therefore funds have been used to accumulate cash and repay debt. Second, in 2020 some warrants expired meaning a $3.7 million dollar injection of capital (against 3.7 million new shares).

The company has not needed to expand its capacity yet, with 60% capacity utilization according to the last quarter report. The reason is the company acquired Joseph Epstein Food Enterprises in 2017 and has used their plant since then.

Finally, MMMB’s shareholder structure is also good from a value perspective because 50% of the shares are held by directors and managers. This means that the company’s management’s interest is aligned with that of the retail shareholder.

Probably because of these reasons and because we are in a crazy valuation market, MMMB traded as high as $100 million in April last year before falling to a current market cap of $65 million.

Challenges going forward

The numbers from the latest quarterly report have cast doubt over MMMB’s capacity to keep growing at the same rates it has previously.

Year on year revenue growth has been good, 10%, but without any increase in gross or operating profit. This means that during the latest quarter MMMB has lost margins, probably because it was not able to pass price increases to customers yet.

According to an interview to the company’s CEO, Carl Wolf, by Seeking Alpha, the effect of price increases in margins will be felt in the last quarter of 2021, with figures not revealed yet.

Another preoccupying datum is that while total sales have increased, in four out of five national regions they have decreased, as the table below shows.

MMMB revenue by geographic segment

MMMB’s revenue by geographic segment

MMMB’s 3Q21 10-Q report

So one of the challenges is inflation and its effects on margins and competitive positioning. Another challenge is creating new avenues for growth.

This is important from a valuation perspective because future multiples will depend on future earnings but also in future growth prospects. If the company increases earnings by two, but has lower growth prospects, then its multiple may contract, leaving a net zero effect on the stock price.

Something clear is that the company plans to continue its main strategy of providing healthy tasty foods at affordable prices. Throughout the company’s materials we can see that management believes the population is increasingly food conscious and they want to appeal to that population.

As we saw in the chart from the previous section, MamaMancini has already fully penetrated an important amount of the big supermarket chains, although some of the big names are under occupied. What this means is that with business-as-usual growth can continue but only up to a certain point, after which there will be saturation.

MMMB has two strategies to create new growth.

The first one is to create a food services division that will sell to restaurants, hotels, universities, stadiums, convenience stores, etc. The division was created before the pandemic but it has not been able to prove itself yet. The company does not provide separated segment reporting on this division.

The second strategy is to increase their shelf space in already penetrated supermarkets by offering new products that they can later escalate. Instead of developing the products, management believes that the industry has consolidation potential, and therefore wants to acquire new products.

The only example of this strategy yet is the announcement in December 2021 that MMMB was acquiring T&L Salads and Olive Branch for $14 million.

These two companies will be merged and continue to operate separately from MamaMancini’s main business. The strategy is to include their products (chicken salads and olives) in the space given to MamaMancini in supermarkets.

Additionally, T&L Salads already generates a significant portion of revenue from sales to the food services segments in the Northeast, providing synergies to MMMB’s new division as well.

Finally, T&L Salads already operates a plant in New Jersey with similar FDA certifications to those of MMMB previous plants. The company plans to use part of that plant to increase MMMB’s main products capacity.

The purchase price of $14 million is equivalent to 150% of MMMB’s equity and will be paid in cash mostly, financed by a loan with M&T Bank. This is a big acquisition to start with, that will have an important effect on the balance sheet and the income statement not easy to predict yet.

Summary and must watch items

We believe that uncertainties are too many to consider buying MMMB at current multiples. However, we also believe that the company has had a fantastic road up to this point, and therefore deserves to be in any watchlist.

Specifically, we want to monitor the following uncertainties, from most recent to most distanced. First, how did last quarter price increases affect sales. Second, how did the latest acquisition affect the balance sheet and how much will be paid in interest from now on. Third, how will the consolidation of T&L impact sales and synergies of the company.

Of course, we also need to follow the price. We believe that under $40 million market cap MMMB is definitely a buy, that is, a stock price of $1.2 or lower. If the stock does not drop to this level, we will simply await for the developments mentioned in the previous paragraph.

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