Tattooed Chef (NASDAQ:TTCF), a plant-based food company, presented further losses in its latest Q2 earnings report. If that keeps up for the next several quarters, TTCF stock is not going to rise anytime soon. I wrote about the company’s losses and its prospects last month and since then it has dropped.
Investors will not likely continue to tolerate a food company without profitability, even though it is plant-based food. As a result, don’t expect to see TTCF stock rise anytime soon.
TTCF stock has essentially gone nowhere this year, although it has been a bumpy road. The stock ended last year at $22.89, but as of Sept. 27, it was down 15.8% to $19.28 per share. And this is after it spiked to well over $23 three different times this year.
But with the company’s continuing losses, especially its negative free cash flow (FCF), it’s not likely that TTCF stock will rebound any time soon.
Tattooed Chef’s Tattered Finances
One reason is that the company is burning through cash each quarter. The Tattooed Chef cash flow statement in its 10-Q filing showed negative free cash flow (FCF) last quarter.
On page 5 of its June 30 10-Q, investors can see that in the past six months, the cash flow from operations was a loss of $24.372 million. After subtracting an additional $10.14 million, the FCF loss was $34.512 million during that period.
Last quarter, the company’s 1o-Q filing (page 4) showed an FCF outflow of $20.426 million. This implies that its Q2 FCF losses were $14.086 million. So on a run-rate basis, this means that Tattooed Chef is operating on an annual rate of $56.344 million in cash burn.
That also implies that the company is going to quickly use up a good portion of the $140.182 million in cash it has on its balance sheet. This can be seen on page 1 of its latest 10-Q filing.
For example, if it uses up $60 to $65 million in cash over the next year, the balance will be just $80 million or less. At that point, if its cash burn is still this high, the market will assume that the company will have to raise more cash. That will push TTCF stock even lower.
The company has not tried to hide its situation. They have made it clear that they are investing in their operating capacity. They believe that with scale their plant-based food company will become profitable over the long run. For example, they recently purchased Foods of New Mexico and integrated it within the Q2 results. The company says that it could produce over $500 million in revenue or twice the rate that Tattooed Chef will make this year.
What to Do With TTCF Stock
Last month I showed that the company has lower gross margins but a significantly higher valuation on a price-to-sales (P/S) metric than its peers. For example, its Q2 margin was just 15.7%, whereas some of its peers have a much higher gross margin, well into the 20% range.
But those stocks trade for between 0.5 and 1.5 times P/S multiples. TTCF stock is at 6.6 2021 sales and 4.9 times 2022 P/S.
This implies that it will be a while before Tattooed Chef grows into its present $1.587 billion market value. The 2023 projection for sales is $450 million. Even if we add in a $250 million contribution from Foods of New Mexico, the total sales will be just $700 million at best.
But at $1.587 billion in market value, the P/S multiple is still over 2.2 times sales. That is still well over what some of its peers trade for. This implies that TTCF could tread water for at least 2 years or so.
Therefore, most cautious investors will wait for the company to start to show some form of profitability before investing. This is the best way to wait for a bargain entry point for the stock.
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.