A tough industry
In his book Zero to One, Peter Thiel describes two different ways industries can develop—monopolies and, well, nonmonopolies. Non-monopolistic industries are filled with products that are undifferentiated and widely used (think: screws, bolts, etc.). Monopolistic companies have differentiated a lot products that are very difficult to replace. Profits for non-monopolistic companies are often contested: if you start making money selling the bolts, someone else will eventually come in and start selling the bolts for less, causing each of you to compete with your profits.
The food industry is definitely a non-monopolistic enterprise. It’s an extremely difficult space to succeed in, which makes the meteoric rise of Mom’s Creations (NASDAQ:MOM) the more interesting.
In the last year, Mama’s is up almost 300% while the Russell 2000 (RTY) has lost 1% in the same period.
This growth comes after a monster year for the company. In FY2022 (ending January 31, 2022), the company posted $47 million in sales. In FY2023, the company booked $93 million in revenue. The big question on investors’ minds, then, is whether or not the growth can continue.
Let’s dive in!
Mama’s Creations is the parent company of Mama Mancini’s, which is the largest brand under which the company’s products are sold.
Mama Mancini’s specializes in meatballs, deli meats, sausage and other related items.
There’s a line from the Showtime show billions where Bobby Axelrod – the bad hedge fund manager – advises a young analyst working at a food company to “always put a company in your mouth when you can.” In other words, try the product.
Those unfamiliar (or unable) to try the product due to availability could be forgiven if their default position is skepticism – after all, how good can these meatballs be?
Well, according to customer reviews, pretty good. The company has an expanding partnership with Costco (COST), which is itself a sign of high quality (Costco is known for it rigorous review of its product).
The partnership with Costco is also expanding. CEO Adam Michael had this to say about relationships at last earnings call:
Recently, we expanded our partnership with Costco, penetrating the Los Angeles region, marking the fourth of 8 regions nationally. This increase includes our first non-meatball product, a 3-pound sausage and pepper sleeve kit for the December rotation along with MamaMancini’s beef meatballs. 2023 has seen us expand our relationship with Costco both in terms of order volume, which has already made 2023 a record year with this customer in terms of order recently receiving a record $1 million order. This ensures our triple play with Costco, having the largest orders in our history, with the most regions in a year and now having many items in a year. We look forward to working closely with Costco to explore other exciting products for their highly engaged customer base.
The company has a similar one review profile at Sam’s Club:
Evaluation and Growth
Mama’s Creations, then, is a very interesting non-technological growth story. The company is profitable, and rapidly scaling. With his meteoric year, it’s no surprise that the ratings have become a bit stretched.
Today the stock trades at 22 times forward earnings estimates and 13.6 times EV/EBITDA – so, not exactly cheap. However, the company has considerable room for growth. Take a look at the company’s sales by geographic region from it last quarterly submission:
As an East Coast-based company, it’s no surprise to see that the Northeast and Southeast will boast the company’s biggest sales. Remarks from Adam Michael, however, suggest the company is working aggressively to expand its footprint and generate similar sales profiles in the West, Southwest and Midwest. On that front, the Midwest seems to be catching up to Mama Mancini–sales in the region were up 56% year-over-year.
Wall Street analysts seem to agree that Mama’s Creations’ runway for growth is quite large. Of the three analysts covering the stock, two rate it a buy and a strong buy.
Analysts have also recently raised their target price. Today, the stock is trading 85% below analysts’ consensus target of $7.50 per share.
What are the risks?
After all, Mama’s is a micro-cap company, and investing in companies like this carries special risks. In the past the company has issued preferred shares with odd dividend payments. In July 2023, the company converted all Series B preferred shares into common shares, which is good news for investors.
Mama’s also has customer concentration risk. Consider the following from the latest quarterly census:
For the six months ended July 31, 2023, the Company’s revenue was concentrated in three customers that accounted for approximately 22%, 13%, and 11% of gross revenue, respectively. For the six months ended July 31, 2022, the Company’s revenue was concentrated in three customers that accounted for approximately 24%, 13%, and 12% respectively, of gross income.
While we do not know the identity of these customers, we can assume based on management comments that Costco is among them. Regardless of identity, however, at the end of the day 46% of total sales can be attributed to just three customers. Although this support is down 3% year over year, it is not ideal.
Mama’s Creations seems to be a rare bird – a non-tech (and profitable) growth story. Given the risks associated with a micro-cap company like this, we think the story for Mama’s is early days and investors should keep an eye on this up-and-coming meatball maker.
Investors should keep an eye out — the company is set to report its third-quarter earnings after the market closes on Dec. 13. Top line expectations from Wall Street are $26.9 million and $2.22 million in operating income. We think operating income will be the most important number to watch, as the expectation of $2.22 million is a 48% change from last year and indicates that the company is starting to achieve operating leverage.