A closer look at HelloFresh; Greetings from Inverness, Scotland

In yesterday's e-mail, I shared an intriguing stock idea pitched by Luca Pomarelli of LP Capital Management: meal-kit company HelloFresh (HFG.DE).

I was particularly interested because my wife and I have been happy customers for more than six years.

So today, I'd like to take a closer look at the company's historical financials and valuation.

(Note that all figures below are in euros, as HelloFresh is headquartered in Berlin and trades on the Frankfurt exchange – though two-thirds of revenues comes from North America.)

The stock hit an all-time low of 3.45 euros yesterday before closing at 3.65. It's down more than 96% from its 2021 peak, as you can see in this chart:

Normally, a stock chart like this is associated with a dying business and/or one with a dangerous amount of debt.

But in his stock pitch (which you can access here), Luca argued that it's a good business with solid cash flows – and its stock certainly appears cheap. So let's take a look...

When the world shut down due to COVID-19 and people stopped going to supermarkets and restaurants, HelloFresh's business took off.

However, when the world reopened, its revenues flatlined and then declined, while profits plunged before recovering in the past year:

The cash-flow statement tells a similar story. Importantly, even as revenues have declined and the share price has imploded, the company has been generating consistent positive free cash flow ("FCF") over the past three years, with trailing-12-month ("TTM") FCF of 204 million euros:

When looking at a company whose stock price continues to decline, it's important to analyze the quarterly FCF to see if there are signs of a collapse. HelloFresh's has rebounded strongly after a brief dip into negative territory in the third quarter of last year:

The company has used its FCF to make a few acquisitions and buy back stock:

In hindsight, it should have waited to buy back stock, as it was doing so at much higher prices in recent years.

But in the past year, its share count has really started to fall. In the first quarter, the diluted share count was 10% lower year over year ("YOY"):

Turning to the balance sheet, the company appears to have 771 million of debt and 246 million euros of cash. That means its net debt is 525 million euros – nearly equal to the company's market capitalization of 533 million euros as of yesterday.

But that's just at first glance...

Upon closer inspection, 77% of the company's debt (592 million euros) is lease obligations – mostly meal-kit fulfillment centers. It only has 179 million euros of actual long-term debt.

Credit analysts and rating agencies treat lease obligations as debt – and for good reason. They're contractual, largely fixed obligations with an embedded financing cost, they rank ahead of equity, and defaulting on them has real consequences.

However, when we're analyzing a company whose stock price says it might be in a distressed situation, there's a big difference. To address its lease obligations, a company can sublet unused space, negotiate with the landlord, etc.

As you can see in this chart, HelloFresh's lease obligations have been steady for the past three years:

Removing the lease obligations and looking only at cash and debt (all of which is long term), we can see that HelloFresh has always had positive net cash, though it has been declining the past four years:

Overall, this is a decent financial picture – and certainly far better than I expected based on the stock chart. The balance sheet is solid, the company is buying back a lot of stock, and, most importantly, it's generating healthy FCF of around 200 million euros.

What's weighing most on the stock is declining revenue, which is down around 13% to 14% YOY in each of the past four quarters (though only down 7.7% in the first quarter on a constant-currency basis), and down a total of 17% from its peak quarter three years ago.

But as Luca showed in his presentation, much of this is the company deliberately shedding unprofitable customers and marketing spend.

The company also projects that adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") will be between 375 million and 425 million euros this year – 25 million of which is due to severe winter storms in the first quarter. (You can review the company's first-quarter earnings presentation here.)

Investors are dumping this stock as if it's a rapidly melting ice cube, but that's not what I see. Adjusting for the winter storms, the guidance midpoint for this year is flat relative to 2025. And Luca makes a good case that both revenues and profits could grow in 2027.

If that happens, this stock could take off because it's really cheap on every metric...

You don't often see a company generating 204 million euros in FCF with a market cap of only 533 million. That's a multiple of only 2.6 times.

On a price-to-earnings basis, as I noted yesterday, 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 yesterday's close of about 3.65 euros, the stock is trading at only 9.4 times this year's earnings estimates and 6.8 times next year's.

And on a market-cap-to-revenue multiple, after trading as high as 4.2 times, it's down to an all-time low of 0.08 times:

That's right – a profitable, positive-FCF, market-leading global company with 6.5 billion euros in revenue has a market cap of only 533 million euros.

That's way too cheap.

Mark my words, either this stock will recover or someone will make a bid for it.

Off the top of my head, possible buyers include Instacart's parent company Maplebear (CART), Whole Foods Market's parent company Amazon (AMZN), Walmart (WMT), DoorDash (DOOR), and Uber Technologies (UBER).

Also note that two of HelloFresh's biggest competitors were bought by larger companies: Home Chef by supermarket chain Kroger (KR) in 2018 and Blue Apron by Wonder Group in 2023.

Again, HelloFresh has a tiny market cap. It isn't a good fit as an official recommendation for the paid publications I work on here at Stansberry Research.

But at these levels, the stock looks compelling... and has the potential for big upside.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

P.P.S. Susan and I said goodbye to my parents and flew from London to Inverness, Scotland yesterday. Here are some photos of us touring the lovely city: