There are many interesting ideas I want to share from last week's Value Investing Seminar in Italy...
Today, let's start with the most intriguing one: meal-kit company HelloFresh, which was pitched by Luca Pomarelli of London-based LP Capital Management.
He gave me permission to share his 21-slide presentation, which you can access here.
HelloFresh is headquartered in Berlin, and its stock primarily trades on Frankfurt's Xetra exchange under the ticker HFG. (It's also thinly traded over the counter in the U.S. under the ticker HLFFF).
The company serves 18 countries, covering Western Europe, the U.S., Canada, Australia, and New Zealand.
Its main source of revenue (70%) is a subscription meal-kit business. It prepares the needed ingredients and delivers them to customers, who then use recipe cards to cook the meal in about 30 to 50 minutes.
Customers typically pay a $60-to-$70 subscription fee for three two-person meals per week, chosen from a menu of around 45 options.
Here's a picture of a typical order:
The company also has a smaller ready-to-eat meal business (28% of revenues), in which the customer simply reheats the food.
I'm very familiar with HelloFresh because my wife became a customer in March 2020. A friend gifted her a free week of meals when the world shut down from the pandemic.
We've been happy customers ever since. It's inexpensive, convenient, high quality, and delicious. (In the spirit of paying it forward, here's a gift link from me if you'd like to try it out.)
But the stock is a very different story. It has been an absolute train wreck...
As Luca shows in his presentation, it was a pandemic darling. From early 2020 to late 2021, it rose 10-fold to peak at nearly 100 euros per share (note that all figures in this e-mail are in euros).
Since then, it has collapsed 96% to Friday's close of around 3.71:
I love stock charts like this. They tell me that pretty much every shareholder is demoralized and willing to sell at any price. But maybe the company is about to go bankrupt, in which case it would make sense to sell.
Let's take a closer look to see if that's the case, starting with Luca's summary of the business:
He argues that it's a good business, with more than double the market share of its closest competitor in both segments:
Regarding the meal-kit business, Luca argues that it's on a "return to normal" journey:
Luca shows how meal-kit revenues surged during the pandemic and have now returned to their long-term trend line:
Importantly, he shows how HelloFresh has cut marketing expenses as a percentage of revenues to 16%:
Luca also highlights how the company has wisely shed unprofitable customers and countries (Japan, Italy, and Spain). This has hurt revenues but improved profitability:
As for HelloFresh's ready-to-eat segment, Luca argues that growth is now resuming after the company corrected two problems:
He also argues that HelloFresh will benefit from AI:
In summary, Luca expects that the highly profitable meal-kit business will see revenue start to grow again "once low-value customers have churned away," but he says this won't happen before 2027. And in the ready-to-eat segment, he sees accelerating revenue growth and smaller losses.
Turning to valuation, this is an extremely cheap stock. The dozen or so analysts who follow the company expect it to earn 0.39 euros per share this year and 0.54 next year.
At Friday's close of 3.71 euros, the stock is trading at only 9.5 times this year's earnings estimates and 6.9 times next year's.
Why does it trade at such a low multiple? Are the analysts wrong? Is the business a rapidly melting ice cube? Is it losing money and/or burning cash? Does it have dangerous levels of debt?
To answer these questions, I'll analyze the company's historical financials and take a closer look at the stock's valuation tomorrow. Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. We wrapped up the Value Investing Seminar in Italy on Friday. Then on Saturday, we toured the ancient city of Matera, the third-oldest continuously inhabited city in the world, after Jericho and Aleppo (who knew?). And that night, we flew back to London.
My dad, my friend Glenn Tongue, and I toured London yesterday while my wife, Susan, took my buddy David Berman to the Wimbledon men's final. (Last year, I won the Lawn Tennis Association lottery and took Susan to the final. She won it this year, and I gave up my seat so David could have the experience.)
Here are some pictures:
