Tattooed Chef, Inc. (TTCF - Get Rating) is involved in the production and supply of plant-based products under the Tattooed Chef brand name. The company went public through a special purpose acquisition company (SPAC) called Forum Merger II Corp. and was previously called Ittella International. TTCF’s stock has gained 22.4% over the past month, on the back of successful product launches and strategic expansions.

(source: TradingView)

While New Mexico Food Distributors, Inc. and Karsten Tortilla Factory, LLC (collectively referred to as “Foods of New Mexico”) acquisition should help TTCF to significantly increase its manufacturing capabilities, the company is undeniably hemorrhaging money. Its increasing expenses and losses do not justify its lofty valuation. TTCF has lost 5.3% so far this year. And given the company’s bleak financials, we think the stock could be a risky bet right now.

Here is what we think could influence TTCF’s performance in the upcoming months:

Latest Acquisition Can be a Financial Burden

On May 14, TTCF completed the acquisitions of New Mexico Food Distributors, Inc. and Karsten Tortilla Factory LLC (collectively known as “Foods of New Mexico”), a ready-to-eat Mexican food items producer, for approximately $37.0 million in cash. While this acquisition could certainly enhance its manufacturing capabilities and accelerate its expansion outside frozen food products, the company is financing it by depleting its cash reserves. As a result, the company could struggle to stay afloat, given that its expenses are already significantly high.

Bleak Financials

For the first quarter ended March 31, 2021, TTCF reported a net loss of $7.9 million, compared to a net income of $5.9 million in the prior year period. This decrease is primarily attributable to increased operating expenses. TTCF’s operating expense rose 765.8% year-over-year to $20.69 million, primarily due to an increase in stock-based compensation, promotional and marketing expenses. It reported a negative adjusted EBITDA of $3 million, compared to an adjusted EBITDA of $7.4 million in the first quarter of 2020. Moreover, its loss per share came in at $0.10 over this period.

Premium Valuation

TTCF’s trailing-12-month EV/Sales ratio of 9.18x is 313.4% higher than the industry average of 2.22x. Moreover, in terms of forward EV/EBITDA, TTCF is currently trading at 474.75x, significantly higher than the industry average of 13x. Also, the stock’s forward Price/Sales ratio of 7.21x is 307.3% higher than the industry average of 1.77x. TTCF’s trailing-12-month Price/Book multiple of 6.03x is 54.2% higher than the industry average of 3.91.

Consensus Price Target Indicates Downside

Currently trading at $21.67, Wall Street analysts expect the stock to hit $19 in the near term, which represents a potential decline of 12.3%.

Unfavorable POWR Ratings

TTCF has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. TTCF has a Value Grade of F. Its sky-high valuation justifies the grade.

In terms of Growth Grade, TTCF has an F, in sync with the company’s inadequate financials.

Also, it has a D grade for Quality. The stock’s negative ROTC and EBITDA margin of 3.6% and 4.4%, respectively, are consistent with the grade.

Click here to see the additional POWR Ratings for TTCF (Stability, Sentiment, and Momentum). TTCF is ranked #80 of 81 stocks in the B-rated  Food Makers industry.

There are several top-rated stocks in the same industry. Click here to access them.

Bottom Line

Analysts expect TTCF’s EPS to decline 166.7% in fiscal 2021. On top of that its business is bleeding money. Although the recent acquisition could increase its diversification, its weak financials might hamper its growth prospects. So, it could be wise to avoid the stock now.

TTCF shares were trading at $22.87 per share on Wednesday afternoon, up $1.20 (+5.54%). Year-to-date, TTCF has declined -0.09%, versus a 12.62% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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