Tattooed Chef (NASDAQ:TTCF) is still well off its highs from earlier this year. I thought it might be overvalued in my last article on Feb. 26, and so far this year nothing has changed my mind. The problem is that TTCF stock is not likely to move higher until the plant-based food company can show that it has a profitable operation.
The company’s latest results make it clear that it is not concerned about profits right now. They are going for scale, despite having very low profitability. For example, the company just closed on the acquisition of Foods of New Mexico and included it in their recent results for Q2. This helped improve its top line but did not do much for its underlying profits.
As a result, don’t expect TTCF stock to rise very much anytime soon, or at least until the company decides to make profits a priority.
Where This Leaves Tattooed Chef
Sales have been growing at a good pace, but not fast enough to get the company profitable. For example, revenue was up 45.9% to $50.7 million in Q2 on a year-over-year (YOY) basis from $34.8 million last year.
However, this included $4.3 million from the new acquisition, implying that its underlying growth was just 33.3% YOY. More importantly, the company company’s gross profit was $8 million, which implies just 15.7% in gross margin.
That is a very low gross margin for a food company. For example, B&G Foods (NYSE:BGS), a packaged foods and meats company with a similar market cap as Tattooed Chef, has a much higher gross margin. It was 24.1% for the company’s most recent quarter.
Moreover, its sales are expected to be $2.06 billion this year, but its market capitalization is just $1.89 billion. Compare that to Tattooed Chef which has a $1.65 billion market value, but sales that are forecast to be just $242 million according to its own projections. That gives it a price-to-sales multiple (P/S) of 6.8 times with a gross margin of just 15.7%
To be fair, the company did say in its latest earnings release that they expect to have a higher gross margin by the end of the year. Their guidance is for a 16% to 24% gross margin for 2021. That implies that its ongoing quarterly gross margin will be much higher than the 15.7% in its latest quarter.
What TTCF Stock Is Worth
But that still does not make TTCF stock worth 6.8 times a comparable company’s P/S multiple. Other examples drive this point.
For example, Treehouse Foods (NYSE:THS) has a $1.92 billion market cap and is forecast to make $4.34 billion in sales this year. But its gross margin is only 17%, as of its latest quarter. This puts it at a similar market cap and margin as Tattooed Chef, but with a 0.5 P/S multiple, compared to the 6.8 multiple for TTCF stock.
However, there could be one good explanation: expected sales growth. For example, TTCF is forecast to hit $500 million in sales, according to the company’s projections, with its latest acquisition. That would double its growth in a year or so. That compares with almost no sales growth forecast for either BGS or Treehouse Foods.
In other words, the market is paying up for growth, assuming that profits from higher scale will eventually follow. For example, as I explained in my last article, Tattooed Chef originally forecast sales of $1 billion by 2026 on page 34 of its SPAC merger documents. By then, it also expects to have a 35% gross margin.
So if that occurs, at today’s market value of $1.65 billion, the stock is trading for just 1.65 times 2026 sales. That may seem reasonable, as long as investors believe this will happen and they can wait.
What to Do With TTCF Stock
The problem, as is obvious, is that TTCF stock now incorporates all the good news for the next four to five years. That leaves very little upside unless, as is not foreseen now, the company can produce high gross profits and even adjusted EBITDA profits. Right now, Tattooed Chef produces EBITDA losses.
Therefore, most value-oriented investors will wait to see when the company will produce profits. If they are earlier than forecast, then the market might be pleasantly surprised and you will see TTCF stock move significantly higher. But until then, expect the stock to trade in a range of 10% to 20% around where it is today.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.