Tattooed Chef (NASDAQ:TTCF), the plant-based frozen food company, looks to be fully valued, despite huge expectations of growth in sales over the next several years. This is despite a scathing short-seller report that came out on Nov. 19 that has had little to no effect on TTCF stock.
When Kerrisdale Capital came out with its short report, the stock fell a bit from $15.70 down to $14.94. But TTCF stock has not been that low ever again. In fact, it recently reached a peak of $26.81 on Jan. 14, before settling at $24.08 at close on Jan. 21.
Tattooed Chef’s Presentation
Part of the reason for this is the complete denial by the company of the major non-growth themes of the Kerrisdale Capital report on Tattooed Chef. Moreover, it had an Analyst Day on Dec. 15 that was meant to counteract the major assertions of the short report.
The Analyst Day presentation provides 41 slides describing the company’s business and very specific growth guidance. From an investor’s standpoint, the most important ones seem to be on pages 33 and 34.
The first of these two pages show the company’s expected growth, reaching a forecast of $222 million, up 50% from the projected $148 million in 2020. Given that TTCF stock now has a market capitalization of $1.7 billion, this puts it on a price-to-sales multiple of roughly 7.
Moreover, page 34 shows the company’s forecasts for sales growth through to 2026. At the end of the fourth year, sales are forecast to be $1 billion. That puts it at a valuation of 1.7 times 2026 sales.
To put it bluntly, this means investors are paying up for uncertain growth prospects. Therefore, as long as the company stays on a trajectory for this to happen, TTCF stock will do well. But if not, some of the fears and skepticism from the short report could come to pass.
More importantly, Tattooed Chef predicts it will become profitable on an EBITDA basis (earnings before interest, taxes, depreciation and amortization) by the end of 2021. That is when it expects to make between $8 and $10 million in EBITDA.
By 2022, it expects to make an EBITDA margin in the mid-teens. Given that it projects sales of just $300 million, a 15% EBITDA margin would be $45 million. That leaves TTCF stock with a very high valuation of 35 times EBITDA earnings.
In fact, it is not until 2026 that the company’s market valuation today begins to look reasonable. In other words, it’s only the projections of four years in the future that make today’s high price seem ok.
For example, the company projects a 20% EBITDA margin by 2020. On $1 billion in sales that implies $200 million in forecast EBITDA.
Therefore, using today’s $1.7 billion market value, the price is only 8.5 times that projection (i.e., $1.7 billion divided by $200 million). But the problem is we have to discount those earnings in the future to bring them back to their present value. This helps take account of the risks of getting to that number in the future.
For example, using a 20% discount rate for the next four years, 2026 EBITDA would be 48.23% of $200 million today, or $96.45 million. That implies its valuation is 16.7 times the present value of 2026 EBITDA.
If anything, that is a full valuation, by any measure.
What to Do With TTCF Stock
Most investors will want to see the company earnings statements for the next several quarters. This will allow them to see if the company is still on a growth glide path that justifies its present valuation.
Moreover, even if one is to add to their position, the safest course, given the stock’s high valuation, would be to wait for a lower price. At least in that case the investors know that they can lower their average cost.
But frankly, given that TTCF stock trades for 7 times this year’s forecast sales and 35 times projected EBITDA, I will not be buying it any time soon.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.