Mama Mancini's
a fundamental analysis
01/05/2020
Ticker: MMMB
Stock Exchange: OTC (Over the counter)
MarketCap: $50M
Introduction
I should start this analysis by apologizing to the subscribers whom I’ve misled into thinking I would be looking at uranium companies this week. I was! But then something drew me to Mama Mancini’s instead. I’ve been following this company for a while and I think now is the time to write about it. I’ll get back to uranium right after this.
You see, all it takes for these nano-caps to go from undervalued to way overvalued is just a quick mention from some famous investor. It happened with “The Joint” and I don’t want it to happen again. (now that I think of it, I should be looking at “The Joint” as well…)
Quick thesis
The thesis here is that this is a micro-cap with a horrible past of high (and expensive) debt, years of operating losses, BUT one which has a 50% insider ownership, which is growing at 45% year over year and where there is a great probability of doubling or tripling investors money in the next 4 years. And this is just the base case. Interested?
Business overview
Mama Mancini’s is primarily a manufacturer of meatballs but it also makes pasta bowls, meatloafs, stuffed peppers, sausages and sauces which it then sells to supermarkets, usually to the Grab & Go and Prepared Food sections. I didn’t say it was a sexy business. But these are not your ordinary meatballs. Mama Mancini’s meatballs are made with all-natural ingredients and the recipe is derived from the old-world recipe of the original Mama Mancini. It reminds me of Marco Bellini.
It all started when Dan Dougherty (aka Dan Mancini) was looking to make money out of his grandma’s italian recipes. He had the recipes, he had the will, but given that this was back in 2009, he didn’t have a factory or the cash needed to start a business. Fortunately, he met Carl Wolf, the company’s CEO who happened to be looking for a new concept at the time. That’s how Mama Mancini’s started.
Industry Dynamics
The food business is a hard one for a microcap to stand out, let alone grow. These are commodity type products where the big guys usually win. Having said that, Mama Mancini’s has been able to position itself in a way that allows it to grow at high double digits rates. How? They’ve taken advantage of the current all-natural, organic, healthy trend to market their old-world healthy products.
The images below are from a fellow investor who looked at the company back in 2017 and compared it to the alternatives. Although the data might be a bit outdated, I don’t think things have changed much since. What I see here is high protein content with low fat content. Isn’t that what everyone who reads food labels is looking for?
I would like to thank Michael Liu for kindly letting me use his data. Be sure to follow him. Don’t be fooled by his age. He is one of the most thorough investors I know.
In a country where 70% of the people decide what they’re having for dinner after lunch, pre-cooked natural food is right at the heart of a major trend. It combines the benefits of healthy food with the convenience of little time needed to prepare the food.
In the US, fresh foods is an industry growing at 8-10% per year while the dry goods at the center of the store are declining by about 2% per year. It seems like everyone these days wants organic, healthy or vegan food.
Company Specifics
The company sells its products directly to supermarkets and mass market retailers. Although its products can be found in a wide selection of areas inside the supermarkets like the hot bars, salad bars, prepared foods, sandwich, cold deli and foods-to-go, frozen food and fresh meat sections, the company has been shifting from being mostly next to the meat to being in the Deli (Delicatessen) area together with the freshly cooked foods. This way they’re not competing for shelf space with their direct competitors nor do they have to pay for slotting fees. In fact, ever since they’ve moved from the meat area to the Deli, sales went up. People recognize it as a premium fresh product and this way the company can keep its gross margins high.
They sell most of their products directly to the retailers, not through distributors (as is quite common in this industry) which also allows them to undercut their competitors prices while still maintaining its high gross margins. They also sell through QVC. For those of you who are not familiarized with QVC, it’s a TV channel for shopping and it’s a BIG thing in the US. The technical term is direct to consumer marketer. Mama Mancini’s has been on QVC for some time now and they’re one of the best producers there (measured by sales per minute).
Here’s Dan Mancini doing what he does best.
If we look at the image below we can see that Mama Mancini’s products are already selling in several great retailers like Walmart, Whole Foods (from Amazon) or Publix for a total of 25.000 locations. The hasty investor would look at the red circles and think to himself “Humm, these guys can’t grow much more in these retailers. They’ve already fully penetrated them“. But what this image doesn’t show us is that the company is in these retailers with just a few SKU’s (Stock Keeping Unit = single product), while it manufactures 24 different products.
Having said that, there’s a bit too much of customer concentration for my taste. The 3 largest customers account for 45%, 11% and 10% of sales. If one drops your brand, you’re toasted. On the other hand, management has alluded to repeat and greater orders from them, which means that things are jolly. One other interesting thing is that Mama Mancini’s products often go into these large retailers as white-labeled.
They have their own factory (recently expanded and upgraded) with its own brand new testing lab (lower costs) where they produce the food. They ship it frozen inside sealed bags through third parties. The frozen food has 1 year of shelf life. After defrosting, the food can last anywhere from 25 to 30 days inside the bags and once the bag is cut open, the shelf life will be around 3 to 6 days.
The newly expanded factory has 30.000 sq feet and it can handle up to around $75M-$80M in sales (twice as much as today). They’ve also hired a consultancy company who has put in place several benchmarks and processes to improve operations.
We’ll look at the financials on the next section, but I think it’s important to state that most of the operating costs are fixed. As the plant runs higher volume, it gets incremental profit contribution (aka higher margins). There are obviously variable expenses like commissions, trucking, packaging but a lot of the expenses are fixed.
Financials
Sales have been growing and they have surpassed the $10M mark for the first time in the last quarter of 2019. This week the the company said that it had grown sales to $10,7M in the first quarter of 2020. That’s a 45% increase year on year!
I’m introducing Armanino Foods as a way of comparing Mama Mancini’s to a peer, but it should be noted that Armanino’s business is slightly different. It sells (mostly) pesto sauce to the Food Service industry (restaurants, hotels, etc) and this industry has higher margins than retail. (Armanino is another great little company. Be sure to check it out)
Gross margins have been consistently above 30% for the past 4 years which tells us that the product isn’t that undifferentiated. The management has stated that it intends to get the gross margin up the mid 30’s as it scales production (there are some fixed costs in the Cost-of-Goods-Sold).
Armanino has been able to keep its operating margin at 18-19% for years. Bear in mind that it’s also a much more mature company. But, this is where it gets interesting.
There is a big chunk of costs that are fixed and as sales go higher and these costs don’t increase proportionately, the operating margin goes up disproportionately. This is called Operating Leverage. Revenue goes up, costs stay the same, profit increases more than the revenue. (the problem is when revenues start declining).
I believe that, now that the factory is built, and the debt is handled (as we’ll see in a minute) the company will be able to get much higher margins. The management team has said that incremental operating margins going forward should be around 20 to 25%. I don’t really think that Mama Mancini’s will get to the 19% margins of Armanino but I think they can get higher than where they are today.
Now, to better illustrate that operating leverage thing that I just mentioned, I’m posting a chart where we can see the company’s costs as a % of revenue. The Costs-of Goods-Sold are fairly stable at around 70% while the SG&A (Sales, General & Administrative) has been decreasing as a % of revenue. As explained previously, unlike the COGS which are variable, most of the SG&A costs are fixed. If the company sells more meatballs, these won’t go up proportionally. In fact the management has commented that only 15% of the G&A costs are related to sales (thus variable).
And what this should mean for us, investors, is that with increased sales, we should be seeing increased operating margins (and net margins). And this my friends, is good!
Balance Sheet
After years and years of wrong, egregiously expensive financing, the company is finally back on its feet. It has been paying down debt and today it’s debt is at a manageable level of $4,2M (vs a FCF of $2,8M) which I think will be fully paid in the next couple of years.
After building out the factory, today most of the capital needs are related to working capital (mostly inventory) and they can self fund it through the cash generated by the business.
Management / Shareholders
Today Carl Wolf runs the company while Dan Mancini is just a spokesperson (he gets a small royalty on sales).
The management collectively owns more than 50% of the shares outstanding. Carl Wolf, the CEO and largest shareholder with 23% of the company, is an industry veteran. He had previously founded Alpine Lace Brands, a food cheese company, which he sold for $62M. He has also been a member of several boards of private and publicly traded companies. His son in law is the Chief-Operating-Officer and also owns 17,4% of the company.
The compensation structure is very clear and simple. There are no bonuses or incentives. The CEO earns $190K, the COO $211K and the CFO $136K, all very modest salaries, even for a microcap. The CEO has also lended money to the company and still receives interest on that.
Our fellow investor Connor Hailey, manager of Alta Fox Capital owns 5,58% of the business. In fact, it was from him that I got the idea. He too should be thanked for answering my questions and helping me in better understand the business.
Now, the bad thing here is that Carl is 76 years old and he’ll be on his way out soon. I’m not trying to be mean here. It’s just how things are. In fact, they have been looking for a company to buy them out, but with low success so far.
Growth
There are several ways a company like Mama Mancini’s can grow. The first one is to grow the number of retailers, the second is growing the number of stores within each retailer, the third is to grow in existing stores via better product placement.
The first one is the hardest. You know, getting a new account (marketing jargon for a new client) isn’t easy. Let me rephrase that. Getting a new account doesn’t happen overnight. You’ve got to go there and pitch the potential clients all the time. You first have to talk to the sales guys at a given retailer, make him taste your product (called sample) and then convince him to let you go one step up the ladder and sample the product with his superior and then again until you reach the decision makers. This sale cycle can take anywhere between 6 months to 2 years. After this process, they’ll give you Authorization, which means you’re on their list of suppliers. But from an authorization to a real order, many things can still go wrong. For instance, if the person in charge of buying gets replaced, this might all have been in vain (this has actually happened to Mama Mancini’s before).
Once you’re in, all of this becomes much easier. You already know the people, the people already know that its customers like your product so they are more willing to hear you out and try out new products. And that’s why the company is more worried about growing within their current clients than getting new ones. This way they save in sales & marketing what they would otherwise be spending by going after new retailers.
Then there’s a new segment that could turn out to be a game changer: Food Service. The food service industry is huge. There’s restaurants, hotels, schools, cafeterias, care homes, etc. Remember that Mama Mancini’s ships its products already cooked so all you need to do is to heat them. And this isn’t a commodity industry as you might think. Unlike the retail space, which is low margin and you’ve got to be winning the customer over and over again (yes, after you bought it and liked it, you will likely repeat that purchase, but…), the restaurant world is much more stickier. Once a restaurant manager finds a supplier that he likes, he will stick to it for many many years even if cheaper alternatives are available (as long as everything goes smoothly, of course).
There are a couple of ways the company can get into this business line. The first is through direct sales as they’ve been doing with the supermarkets. This is a lengthy process where they have to go door to door to showcase their products. This is why they should go after large restaurant chains. The other one is through brokers and distributors. These will surely take their cut, thus lowering the potential margins, but as we’ve seen with Armanino, this is also a higher margin business, so I think it would even out. The only thing about the Food Service industry is that it’s much more cyclical. Armanino Foods is struggling right now because it has much higher exposure to this market.
Then there are several other growth opportunities the company is exploring. It has just introduced its new meatless line, a partnership with Beyond Meat,which could be anywhere between $15M to $60M according to management. They’re also getting a foot in Canada.
But I think that the most likely outcome is for Mama Mancini’s to be acquired by a larger player who would easily integrate it into its own operations while taking advantage of a larger sales, marketing and distribution structure. This would be great for investors since this potential acquirer would certainly pay a premium to the market’s valuation.
RECENT POSTS
Risks (or just things to bear in mind)
- Risk of health and safety. It would take just one batch of bad meatballs to hurt the company’s reputation
- Lack of depth and breath of management – old managers.
- Customer concentration
- Highly dependent on 1 factory
- Supply chain and raw materials inflation. On a recent interview, the CEO said that due to the current situation, they’re seeing some additional costs with ground beef, but they’ve been able to handle it with higher orders and they’ve cautioning their customers to a possible price raise.
Valuation:
Let’s say that the company makes $47M in 2020 and then it’s able to grow 20% per year up to $71M in 2023. This would be close to the maximum capacity of its current factory, so I’m stopping my math there. If I were to make “guesstimates” for future years I would have to include new capital expenditures for a new factory and although they would have the cash to do it, I believe they will sell the company before that happens. On the other hand, if they really need that second factory, that would mean we should be opening a bottle of wine, not putting numbers on an Excel spreadsheet.
Here are my Base Case assumptions:
- Revenue growth of 15% after 2020 (it’s growing at 45% right now)
- Incremental operating margins of 15% (management guidance is 20-25%)
- No taxes (the company has $9.5M in NOL’s that it can use to reduce taxes).
- Conservative valuation multiples for a company growing 15% per year
Even with what I consider to be very conservative assumptions, I get to an annualized rate of return of 19%. My bear case, where I assume 10% year-on-year growth and 10% incremental margins, gets me to 6% annualized return which in my opinion represents a fairly low downside from here. The Bull case… well, I don’t think I need to talk about the bull case when even the Base Case is so good.
*If you’d like my Excel spreadsheet so you can play around with the assumptions, I’ll be more than happy to send it to you.
Conclusion:
Mama Mancini is a simple story (well, it hasn’t been, but it is now). They buy the raw ingredients, cook them, pack them and then sell meatballs with sauce to the food retailers. Is this the best business in the world? No, it isn’t. Is this the lousiest business in the world? No, it isn’t. Yes, the management team is old and they’ll be looking for an exit and there is high customer concentration so there is a high degree of speculation attached to this stock.
But I like it. The balance sheet is finally “clean”, it’s a stable business, they have the production capacity, they have the experience, the brand, the industry tailwinds, they’ve been growing a lot and they will have very high returns on capital going forward.
Mama Mancini’s will be entering the All in Stocks Portfolio on Monday with 5% of the initial funds. This time I won’t be buying it sparsely as I have with Facebook given that this company is so small that it can overshoot in no time. Connor Haley has just released his Q1 Letter where he talks about it and since he is a well known microcap investor, there might be others looking at it soon.
Selected material for further research:
LD Micro 2020 Conference (call with the CEO)
The Wall Street Source (call with the CEO)
Mike’s analysis on Seeking Alpha (I think it’s paywall protected. If you can’t access it, I’ll send you a word document with it).
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