The plant-based food space has been a hot investment area for many months. Popular stocks such as Beyond Meat (BYND -2.00%) have enjoyed explosive returns thanks to solid growth and exposure to a trendy industry still in its early days.
While Beyond Meat is a tempting long-term hold, there is another competitor I prefer with better financials and a more modest valuation. That company is Forum Merger II (FMCI), a special purpose acquisition company (or SPAC) set to merge with Ittella International later this year.
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Ittella International and the Tattooed Chef brand
Ittella International is a plant-based foods company that grows its own organic vegetables in Italy, and hand-prepares gourmet food bowls plus other items such as cauliflower wings and burgers. Upon completion of the merger, Forum Merger II and Ittella International will form a combined entity called Tattooed Chef -- the brand Ittella has developed in recent years. Tattooed Chef is dedicated to clean ingredient labels, comparing favorably to a Beyond Meat ingredients label, which resembles a science experiment.
Aside from quality ingredients -- and more importantly to investors -- Ittella's financial performance has been strong. From 2009 to 2017 it grew to a respectable $32.5 million in sales. In 2017, the company decided to pivot entirely to its brand, Tattooed Chef.
With the shift, Tattooed Chef is expected to enjoy a 61.7% compounded annual growth rate (CAGR) in sales by 2021, compared to Beyond Meat's still strong but inferior 55.4%. In the first six months of 2020, growth for Ittella's Tattooed Chef brand sped up to a remarkable 97%.
That recent outperformance in growth by Tattooed Chef should power the company to $222 million in sales for 2021. Based on a pro-forma enterprise value (EV) of $482 million, 2021 forward EV-to-sales (EV/S) of 2.2x looks way cheaper than Beyond Meat's 13.2x 2021 EV/S.
Ittella's main Tattooed Chef customers as of today are Walmart, Costco Wholesale, and its online direct-to-consumer (DTC) channel. It's still early days in order to assess how the Tattooed Chef brand is performing in stores, but there are signs the debut has been successful already. As of a few weeks ago, the company's Tattooed Chef brand was in just 7% of Walmart stores. Sarah Galletti, founder of the Tattooed Chef brand and Creative Director at Ittella, said she is confident that number will jump to 50% by year-end, offering her company thousands more stores to sell to nationally.
Based on my own conversations with industry veterans familiar with the company, it doesn't seem like Tattooed Chef has come close to its ceiling. My main takeaway: The company cannot produce products fast enough to meet demand. That's a good problem to have.
Going forward, Galletti sees smaller, regional grocery chains as a natural growth avenue for the Tattooed Chef brand's products. Based on promising news out of Walmart, it's feasible to think she could find success there as well.
A more modest valuation despite rapid growth
Importantly, Ittella's accelerating growth coincided with its shift to Tattooed Chef, rather than the private-label sales it had been focused on previously. The transformation has directly led to EBITDA margins quickly expanding from 0% in 2018 to 11.6% this year.
By 2021, that is set to expand further to 13.9%, again comparing favorably to Beyond Meat's 10.4% for the same forecast period. Based on rapid growth and quickly improving margins, the future Tattooed Chef currently trades for a forward EV/EBITDA of 15.6 times compared to Beyond Meat's 126.8 times. Based on superior growth, wider margins, and a cleaner product, the Tattooed Chef brand is poised to do quite well going forward.
Plant-based food in North America is poised to enjoy a 14.1% CAGR through 2024. Under that scenario, many companies will thrive, but Tattooed Chef is better positioned than most to do so. Its combination of superior growth and a reasonable valuation is especially compelling given the quickly expanding space it operates in. Forum Merger II -- soon to be called Tattooed Chef -- will be a tasty part of my portfolio for years to come. You should strongly consider it as well.
