Not All Pandemic Stocks Are Equal. Why Beaten-Down HelloFresh Is a Buy.
Many stocks that benefited from trends accelerated by the onset of the Covid-19 pandemic are looking past their prime.
Peloton Interactive (ticker: PTON) was seen as the future of home workouts, but growth has stalled. Zoom Video Communications (ZM) stock isn’t much higher than when many people started working from home.
On the surface, HelloFresh (HFG.Germany) looks like a similar story. Shares in the world’s leading meal-kit delivery company are down more than 20% this year, putting it near the bottom of Frankfurt’s blue-chip DAX index. But not all pandemic stocks are equal. HelloFresh is bruised, but it’s a buy. The stock benefits from tailwinds predating Covid-19 and is undervalued by multiple metrics.
HelloFresh’s business is delivering weekly meal kits to subscribers. Consisting of preportioned ingredients and cooking instructions, the kits offer choices across cuisines and dietary preferences. “Venison Steaks and Creamy Peppercorn Sauce” and “Zucchini Pomodoro Penne Bake” were among the recent offers.
It was a winning recipe for years in a business with attractive unit economics. Founded in 2011, and now operating in 16 countries with more than 15,000 employees, HelloFresh stock rose 84% from its initial public offering in 2017 to the end of 2019, when the company posted its first annual profit on an adjusted basis.
The German company views its current total addressable market as 176 million households, including 77 million in the U.S. Its penetration into this group is just 3.5% to 4.5% but rising; revenue growth has so far outpaced penetration growth.
The global food segment is valued at 7.5 trillion euros ($8.5 trillion) by investment bank Berenberg, and HelloFresh has already beaten out scores of competitors to dominate one of this industry’s most disruptive sectors.
Now, caught up in a market rout, the shares look undervalued. HelloFresh has a market value of €9.3 billion and fetches a multiple of 35 times this year’s expected earnings, a 30% discount to its peers and below its own historical average. “HelloFresh’s valuation has strong earnings support, unlike many stocks with which it is being wrongly bracketed,” says Sarah Simon, an analyst at Berenberg.
The stock looks even cheaper by other metrics. Start-up rival Gousto raised $100 million from SoftBank just last month; applying a similar valuation multiple to HelloFresh implies a share price some 250% higher than its current level, according to Credit Suisse’s Victoria Petrova.
HelloFresh will report full-year earnings in March. Analysts surveyed by FactSet expect a record €520 million in profit, based on a preferred adjusted metric, on sales of €5.87 billion—representing almost 60% annual growth. As for guidance, the company has said it expects revenue to rise an additional 20% to 26% this year.
HelloFresh does risk spending into a future where consumer trends are more uncertain. At its capital markets day in December, the company revealed a plan to double investments in 2022 as it builds out capacity and technology. That will pinch margins, but many analysts remain confident that leadership has the right ingredients for growth.
“Since IPO, HelloFresh has defied the skeptics and delivered far more than was expected of the company,” Simon says. “Management has proved far better at predicting the future than the capital markets.”
Investors have soured on pandemic stocks, but HelloFresh offers more than just a tasting course in returns. Brokers are bullish, with an average target price on the stock implying upside approaching 60%.
Now, that’s appetizing.