MamaMancini’s Holdings (NASDAQ:MMMB) is an Italian food manufacturer and distributor that intends to become a $1 billion one-stop shop deli solutions supplier. Over the last decade, the company’s revenue has increased nearly tenfold, primarily through acquisitions. I believe it is an attractive firm with a lot of potential, but the operating income margin appears to be low, and the company appears to be overvalued at the time. Let’s go over everything.
A Business and Financial Overview
MamaMancini’s, launched in 2010, is a manufacturer and distributor of beef, turkey, chicken, and hog meatballs based on a family recipe. Among other things, the company sells lasagna roll-ups, marinara sauce, peppers, chicken strips, salads, couscous, panini, and olives. MamaMancini’s was listed in 2013 in a reverse takeover arrangement with Mascot Properties, and its revenues have expanded dramatically since then, although from a small basis. However, it is worth noting that much of the growth came from M&A, and the TTM operating income is still negative due to a lack of synergies and economies of scale.
To date, the company has made two important acquisitions: Joseph Epstein Food Enterprises in late 2017, and T&L Creative Salads and Olive Branch in late 2021. While these transactions significantly increased revenues in FY19 and FY22, I believe they fell short of expectations. Let us begin with Joseph Epstein Food Enterprises. This was the sole maker of MamaMancini’s meatball products in 2017 and was controlled by the latter’s president and CEO at the time, Matthew Brown and Carl Wolf. The agreement was anticipated to increase EBITDA and net income by $1.5 million to $2 million in the first year alone. Despite this, operating income increased by only $0.2 million in FY19, while net income increased by only $0.2 million. T&L Creative Salads and Olive Branch, on the other hand, sell poultry goods and olives, and savory products. When this $14 million acquisition was announced, the two new firms were predicted to create $35 million in sales in 2022 and greatly enhance MamaMancini’s net income due to their strong symbiotic relationship with the company’s current distribution network.
T&L and Olive Branch reported combined revenues of $48.2 million and a combined net income of $1.5 million for the nine months ended October 2021, according to MamaMancini’s Q3 FY23 financials (see page 13 here). However, revenue for the two companies fell to $35.7 million in the nine months ending October 2022. The bright side is that their aggregate net income increased to $2 million. However, this means that the rest of MamaMancini’s business is struggling to grow, as sales for the nine months ended October 2022 increased by $37.1 million (or $1.4 million excluding T&L and Olive Branch), while net income fell to $0.5 million due to rapidly rising general and administrative costs.
Looking ahead, MamaMancini believes it has the potential to reach $1 billion in sales by 2030 by focusing its expansion on the deli industry. Due to time and budget constraints, grocery deli sections in the United States are quickly becoming the dinner of choice for shoppers. According to a recent Grand View Research analysis, the US chilled and deli foods industry is predicted to develop at a compound annual growth rate (CAGR) of 7.1% from 2022 to 2030.
MamaMancini’s appears to be planning to achieve a large portion of its expansion through M&A once more, and the company selected Adam Michaels as CEO beginning September 6, 2022. He most recently oversaw M&A at Mondelez’s (NASDAQ:MDLZ) North American Ventures business segment, whose acquisitions in recent years have included nutrition bar manufacturer Perfect Snacks, chocolates and snacks producer Hu Master, and cookie maker Tate’s Bake Shop. While MamaMancini’s hasn’t made any new acquisitions since Michaels took over, I expect that to change soon, and I believe the $1 billion revenue target is reachable. However, my concern is that the balance sheet appears to be in rough shape at the moment, which means that inorganic growth will have to be funded through large loans or significant stock dilution if the company pays in shares or conducts equity offerings to raise cash. MamaMancini’s had only $3.5 million in cash as of October 2022, and its tangible book worth was negative. In turn, net debt was $7.6 million.
Overall, I believe MamaMancini’s business isn’t worth much right now because organic growth is sluggish and net income came from T&L and Olive Branch in the first nine months of FY23.
So, how do you approach this? According to Fintel data, the short borrow cost rate is only 4.5% as of the time of writing, and it takes only 0.4 days to cover. However, I believe that short selling is risky in this situation.
Risks
When it comes to the bear case, I believe there are three key ones. For starters, the share prices of microcap businesses can rise for illogical and unclear causes. Second, MamaMancini’s history of rapid revenue development and ambitious ambitions may entice growth stock investors, implying that the downside potential is limited. Third, Michael’s first full quarter as CEO resulted in a significant improvement in the company’s financial outcomes, which could continue in the coming quarters. The gross profit margin more than doubled quarter on quarter to 25.5% in Q3 FY23, while net income was $1.1 million.
Takeaway for Investors
MamaMancini’s is a modest M&A-focused company with big intentions in a rising market. The financial figures for the first full quarter under the new CEO’s guidance showed a significant improvement in the company’s profitability. Overall, I think MamaMancini’s is an interesting company that I’ll keep an eye on, but it appears overpriced at the moment given its weak balance sheet and sluggish organic revenue growth. In my opinion, there will be significant equity dilution as the company grows in the next few years, and I’m concerned about its lackluster M&A history. Risk-averse investors, in my opinion, should avoid this stock.
Featured Image: Freepik @ timolina
