Description

Tofutti Brands (TOFB) sells a portfolio of unique products for the health-conscious and Kosher community. It has been in business for over forty years and has valuable dedicated shelf-space accross major health food stores and retailers accross the US. The shares have sold off to two year lows recently due to the macro effects on expenses that have impacted all companies in the Covid-19 and inflationary environment; namely, increased raw materials and freight expenses and supply chain issues. As these issue resolve we expect the price to recover from its current $1.55 level to the pre-Covid $3 level. There is no fundamental issue with the business and earnings recovery will come as prices adjust and supply chain issues are resolved.

TOFB is engaged in the development, production and marketing of dairy free, vegan frozen dessert and cheese products. All the Company's products are vegan, dairy free, contain no butter fat or cholesterol and use soy and other vegetable proteins. Dedicated customers find the products similar in taste and texture to standard cheeses and ice creams, but without the unhealthful ingredients of the standard products. In addition, all the Company's products are certified kosher-parve and all the vegan cheese prodcuts are also certified halal.

David Mintz was the founder who started in Brooklyn when he first produced Tofutti Ice Cream. His creation, which he marketed under the Tofutti name, consisted of tofu emulsified with vegetable oil and mixed with alfalfa and other ingredients. Thanks to his flair for marketing, it became widely known as the first commercial tofu ice cream. He, unfortunatelly, passed away in February, 2021 and his son, Efraim Mintz, took over the CEO position of the Company. The Mintz family through the Estate of David Mintz, controls 51% of the Company shares. 

The current product line has very successfully over the past five years expanded to various cheese products. The Company's prodcuts consist of:

Dairy Free Vegan Cheese Products:

1) Better Than Cream Cheese: a dairy, butter-fat and cholesterol free product which tastes similar to traditional cream cheese.

2) Tofutti Whipped Better Than Cream Cheese

3) Better Than Sour Cream: again, a dairy, butter-fat and cholesterol free product that tastes similar to traditional sour cream

4) Tofutti Dippity Do Dah Dips: Various flavors of the Better Than Sour Cream product.

5) Tofutti American Vegan Cheese Slices: a dairy and gluten free alternative to regular cheese slices.

6) Better Than Ricotta Cheese: a dairy free alternative to ricotta cheese which is remarkcably similar to actual ricotta cheese

Frozen Desserts:

1) Tofutti: the original Company product which is an alterantive to ice cream, comes in six flavors and is sold nationally. It is the first dairy-free frozen dessert to be marketed to the general public through supermarkets. 

2) Tofutti Cuties: The Comapny's best selling frozen ice cream product. Cuties are bite-sized frozen sandwiches. And of course, they are dairy, butter fat and cholesterol free.

The Company's latest quarterly sales were almost $3 million, for the second quarter of 2022, and were essentialy flat with last year. The highly successful cheese product line was almost 85% of sales. The Company anticipates that sales will be higher in the second half as implemented price increases take effect. Gross profit margin decreased materially from 25% last year to 18% in the current quarter. The decrease was caused by substantial increases in certain ingredients and freight expenses. The Company is experiencing lingering supply chain issue caused by Covid-19 and the high cost of petroleum. Besides causing significant increases in freight costs, higher petroleum prices have increased the cost of packaging materials. The Company experienced a net loss of $208k this quarter versus a profit of $28k last year. 

The Company's profitability issue is caused by macro issues and not any Company-specific issue. Fiscal 2020, ending January 2, 2021, the last pre-Covid year is probably more represemtative of the business. In that year the Company had sales of $13.8 million, a gross margin of 30.8%, and income of almost $600k or $.12 per share.

The Company's balance sheet is pristine with $1.2 million in cash ($.23/share), a current ratio of 7.5 and no long term debt. Tangible book value is $.85 per share.

At its current price the Company sells for 1.8 times book, 11 times pre-covid normalized earnings (adjusted for the Company's cash balance), and .47  times normalized annual sales of about $14 million. My argument is that this Company should sell for at least 1 times sales , given its national shelf space amd brand-equity.This would transalte to a price of about $2.72 per share, a 77% premium to its current price.

Now, here is my fundamental issue. Why is this tiny Company public? What benefit does it derive from paying almost $0.5 million to its CEO? Shouldn't this Company be sold to a larger consumer products Company that could put more advertising dollars into its products and remove the unecessary small Company overhead? A larger Company could certainly exploit the 40 year brand recognition of its Tofutti Ice Creeam and extremely popular Cuties. The bottom line is the Company should be sold. The death of the founder could be the impetus to drive a sale as the next generation seeks liquidity. In addition, an argument could easily be made that it should sell for two times sales or $5.40 per share, a 250% premium to its current price.

Concerns:

1) The Mintz family controls the shares and it will be diffcult to get them to do what is best for the outside sharehoders. David Mintz certainly did not want to sell, but perhaps the son, Efraim, will have a different objective as he receives pressure from his family to liquidate and realize the value of the Company.

2) The float is very small and the shares are illiquid.

3) The cheese products have been extremely successful, but sales of the ice cream products have declined over the past five years.

4) The Company does not have the funds to effectively advertize and market its products.

5) The Company relies on third-parties to maufacture its products to its specifications. Any problems or issues with the manufacturing of their products  are not directly under their control.

The bottom line is the shares are depressed because of macro cost issues, which will be resolved over the next year or so and we can expect the shares to recover to the $3 pre-Covid level. The shares, given their brand equity and profitability, should be valued at a least one times sales, $2.70, and an argument could easily be made, based on the sale of similar brands, that the shares would sell for two times sales, $5.40, in the private market. 

Catalyst

1) Profitability recovers to pre-Covid levels.

2) The Mintz family decides to sell the Company to liquidate the value of their inheritance from the late David Mintz.