MEDITERRANEAN
I love growth stocks, and you should too, given their potential to generate tremendous returns over the long term.
But these returns are not equally distributed over time. Growth stocks tend to face excessively steep drawdowns and long periods of zero returns when valuations get too frothy and/or the economy lands in a recession.
Valuations are high today (21x fwd P/E on the S&P 500 vs 18x average) and more importantly, the economic activity seems to be rapidly declining. As you probably read before, the unemployment rate unexpectedly rose to 4.3% last month, triggering the Sahm Rule and sending a shock through Wall Street. Since 1953, 11 out of 11 times the Sahm Rule was triggered, a recession occurred.
Just like me, this data might get you worried about investing in growth stocks.
But not all of them are equal. Some growth stocks, like semiconductor stocks which performed very well in 2023 and early 2024 due to the AI craze, are highly cyclical. If the economy turns South, their growth will likely falter and stock prices could be in big trouble. I would suggest you to approach them with a very high degree of caution.
Luckily, there is another category within the growth spectrum, which I call defensive growth. These companies are rapidly growing, and can do so both when the economy is expanding or contracting. They are mostly found in the Health Care and Consumer Staples industry.
Today, I am presenting you my favorite consumer staples growth stock, Mama's Creations (NASDAQ:MAMA). It is an upcoming food company that I believe gives investors the best of both worlds - high upward potential combined with limited risks.
From Italian meatballs to a deli-foods service provider
It is always nice when your investment is backed by an amazing founding story. Mama's Creations definitely delivers on that part.
Dan Mancini originally founded the company under the name MamaMancini's. His grandmother Ann Mancini made delicious Italian meatballs when Dan was a teenager. The recipe was never written down, but Dan remembered it vividly even decades later and decided to bring it to the market in 2009, together with entrepreneur Carl Wolf.
The unique brand resonated with consumers and generated solid growth over the years. However, in 2021 management saw opportunities to accelerate growth even further by diversifying its business to additional ready-to-eat fresh meals.
As such, the company strategically shifted to not only sell meatballs under its own brand name, but also sell other white-label products such as salads, wraps and paninis. As such, the company also got renamed to Mama's Creations in 2023.
Today, Mama's products can be found in over 8,400 grocery, mass, club and convenience stores nationally. When you buy something from the deli foods section in grocers like Costco, Sam's Club or Whole Foods, there is a high likelihood that you have tried one of its products already.
Mama's Creations IR
Why MAMA can perform well in a tough economy
Big grocery chains are very excited to partner with Mama's Creations. That is caused by a significant shift that is going on in the industry: the rise towards deli foods.
Deli foods are fresh and ready to eat, and thus a good alternative for consumers who have no time to cook as their lives get busier and busier.
Additionally, deli foods are affordable, attracting consumer who are avoiding restaurants that got too expensive in the recent inflationary environment. In fact, this price gap is only increasing, as food at home prices rose by "only" 30% over the past decade versus 50% for food away from home.
According to management, 93% of grocers have seen increased demand for fresh food over the past two years due to this trend. As a reaction to that, 84% of grocers are expanding their deli foods offerings, giving more and more space for products that companies like Mama's Creations deliver.
This occurred recently, during a strong economic period. But what if a recession occurs? Do you think Mama's would sell less or more products?
Well, the overall food industry should remain intact, as food is a basic necessity. What might happen, however, is a shift from more expensive categories like restaurants towards more affordable ones such as groceries.
We have no historical precedent for Mama's Creations itself, given that it was founded in 2009, but we can take a look at what happened with packaged foods and meats peers such as General Mills (GIS):
- During the recession of 2001, General Mills grew its sales from $5.17 to $5.45 billion and earnings from $635 to $687 mln. The stock price barely moved.
- During the recession of 2008-2009, General Mills grew its sales from $12.4 to $14.7 and earnings from $1.14 to $1.30 bln. After a short-term correction, the stock price reached new all-time-highs in one and a half year.
It is clear, packaged food companies can be highly defensive in a recessionary environment, and so should Mama's Creations. Especially when we account for dollars within the industry shifting towards deli foods.
The growth catapult of ex-Mondelez executive is being unleashed
Over the past decade, Mama's Creations has grown its revenues by a staggering 31% annually since FY2016, while it transformed from a cash burning company to a cash machine.
But with the new management team that joined the company in 2022, there is reason to believe that the growth story is just getting started.
Adam Michaels is the new CEO since September 2022. Mr. Michaels had been active for 9 years with Mondelez International ($93 bln market cap) in various Director and President roles. He joined the much smaller Mama's Creations ($282 mln market cap), likely because he was excited about its authentic story and growing category.
Listening to the conference calls, Adam Michaels appears to be a very capable executive to lead Mama's during its next stage of growth.
In his first two years, Michael introduced the 3C strategy to improve three fundamental pillars of the company: costs, controls and culture. Mama's became, as he calls it, "brilliant at the basics".
Last February, he added a fourth C which should make you very excited: Catapult.
Mama's Creations intends to accelerate revenue growth by:
- Increasing its brands' recognition amongst consumers. Lauren Sella, previously Brand Officer at Mondelez and Chief Marketing Officer at Tate's Bake Shop, got attracted as new Chief Marketing Officer to execute on this.
- Expanding its sales channels. You can now buy meatballs online via the MamaMancini's website and through Amazon.com. Also, Mama's is continuously trying to enter new large grocers.
- Expand within its core customers. The average number of items carried by customers expanded from 5 to 7 since Michaels joined, and he wants to increase this number much further by introducing new items. To accelerate launches, the company is investing in trade promotion initiatives.
Revenue growth has beat analyst consensus each quarter since Michaels joined and has been accelerating over the past four quarters, showing the first signs of the Catapult strategy:
- FY Q2, 2024: +9%
- FY Q3, 2024: +12%
- FY Q4, 2024: +17%
- FY Q1, 2025: +29%
What will the remainder of fiscal year 2025 look like? Adam Michaels officially remains conservative with "double-digit growth" guidance, but his remarks during the last earnings call indicate that we might expect good things from new customers in the back to school season (FY Q3).
He stated that Mama's is having conversations with new major retailers where they don't have a foot in the door yet, such as Walmart or Target. According to the CEO, they would enter with some products in these big chain stores in the August/September timeframe.
We will potentially hear more from that during the FY Q2 2025 conference call next month.
Valuation - elevated in the short term, but zoom out to 2030 targets
Mama's Creation's stock price has gained +104% over the past year to a market cap of $281 mln. With $110 mln in TTM sales, $5.7 mln in TTM net income and $11.9 mln in TTM free cash flow, that puts the P/S at 2.6, P/E at 49.3 and P/FCF at 23.6.
This is a rather elevated valuation compared to the industry, underscored by the "F" valuation rating from Seeking Alpha.
However, as we are speaking about a strongly growing company, I believe it is important to zoom out.
Management has the vision to grow into a $1 bln revenue run rate by FY2030. This would represent a +46% CAGR from FY2024, which is a very aggressive goal. That said, given the historical +31% CAGR since 2016 and a management team that is stronger than ever before, I do not think it is impossible.
Meanwhile, management is targeting to become increasingly profitable with low 30s gross margins and 10% net margins in the long term.
If these targets are met, net income could soar to $100 mln by the end of this decade and the P/E would correspondingly drop below 3x at today's prices. This trajectory would look something like the following:
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
| Revenue ("mln") | 103.3 | 139.5 | 216.2 | 356.7 | 517.2 | 724.0 | 1006.4 |
| YoY growth | 35% | 55% | 65% | 45% | 40% | 39% | |
| Net profit margin | 6.4% | 5% | 6.5% | 7.5% | 8.5% | 9.5% | 10% |
| Net profit ("mln") | 6.6 | 7.0 | 14.1 | 26.7 | 44.0 | 68.8 | 100.6 |
| P/E ratio | 42.5 | 40.3 | 20.0 | 10.5 | 6.4 | 4.1 | 2.8 |
(Financial expectations for Mama's based on management guidance; source: Robbe Delaet)
If management reaches these targets, Mama's would look remarkably similar in 2030 to peer Sovos Brands in 2023, a stock which I covered with a bullish rating last year.
Sovos Brands, known from the upcoming tomato sauce brand Rao's, organically grew its sales by +24.6% in 2023 to $1.02 bln. For the year, it reached a gross margin of 30% and an adjusted net margin of 8.1%, good for $83 mln in profits.
Sovos recently got acquired by Campbell Soup for $2.7 bln, or 32 times earnings.
Yes, Mama's current valuation is rather high. But at least, it is not extreme. And it is not the most important thing to analyze for such young growth stories. If we zoom out five years from now, there is still more than enough room for expansion from today's $281 mln market capitalization, if we look at what peer Sovos Brands got bought for.
Risks
I categorize Mama's Creations as a defensive growth stock, which means that it should be able to report strong earnings even in a tough economy. But that does not mean that there are no significant risks with this investment.
Mama's is a small cap (and was even a micro-cap last year), which leads to several risks that larger companies don't have.
First of all, there is liquidity risk for the stock. On average, only 450,000 shares are traded each day, for a total value of $3.5 mln. This can lead to significant short-term price swings, although the recent inclusion in the Russell 2000 and Russell 3000 is making the stock more mature.
Second, small caps tend to have more frequent problems with accounting than large caps. If any problems occur in the accounting, investor confidence in the stock will take a dent.
Third, Mama's Creation's profitability can fluctuate significantly, as small changes in its cost structure can have a big impact on the bottom line. For example, last quarter EBITDA remained flat YoY despite the +29% revenue increase, caused by 66% growth in chicken prices and higher expenses due to key management hires. It is guided that profit margins will return to normalcy by the end of the fiscal year, but it is a warning sign for potential similar volatility in profitability in the future. That said, its balance sheet can weather a storm with a net cash position of $0.4 mln.
Last but not least, my investment case is based on Mama's being able to execute on its growth plans. The stock is valued for significant growth. If not met, the share price can drop very quickly.
Favorable technical set-up
Lastly, I want to discuss the very attractive technical set-up for MAMA. Clearly, investors believe strongly in the future growth story, as they have been bidding up the stock since late 2022.
Interestingly, eight out of the last nine short-term pullbacks during this uptrend have bottomed at the 50-day EMA line. The recent market turbulence has also led to a retracement to this line, which now seems to become another attractive entry point for the next leg higher.
Robbe Delaet with TradingView
Conclusion
Given the uncertain economic environment for the second half of 2024 and beyond, I would suggest giving a closer look to defensive growth stocks as an alternative for cyclical ones.
In my opinion, Mama's Creations is one of the most attractive growth stocks that has the best of both worlds: significant upside potential and limited down-side risk. It combines an impressive management team with accelerating growth and strong profitability metrics.
In the short term, the stock seems highly valued, but if we take into account the long-term growth vision, there is still potential to generate strong returns in the coming years.
Editor's Note: This article was submitted as part of Seeking Alpha's Best Growth Idea investment competition, which runs through August 9. With cash prizes, this competition -- open to all analysts -- is one you don't want to miss. If you are interested in becoming an analyst and taking part in the competition, click here to find out more and submit your article today!
