Barfresh's Juice is Worth the Squeeze

Business is at an all time high, but the stock is at historic lows

Company: Barfresh

Ticker: $BRFH

Price: $1.97

Market Cap: $29M

EV: $27.8M

Summary:

Barfresh sells USDA approved ready to drink smoothies and juice concentrates to thousands of schools across America. In just a few years, Barfresh has captured ~10% market share with 6% coming from this year alone and is completely disrupting the school meals industry by working hand in hand with USDA to develop tasty, healthy breakfast items. However, despite the company guiding for record revenues and profitability for 2024 as well as a reasonable roadmap to $20M+ in EBITDA in 3-5 years, the stock is trading at historical lows. The company could easily earn out its market cap in cash over the next 3 years, and appreciate to a double-digit share price, presenting ~700% upside.

Company:

Barfresh went public 12 years ago with patented technology that allowed people to quickly make the exact same quantity of smoothies without an expensive machine. Over the past 10 years they’ve primarily sold these ready-to-blend, single serve smoothies and consistently grown revenues by expanding in the entertainment, business, education, and QSR channels. Unfortunately, just as they signed a deal with a large QSR brand expected to generate $25-50M in revenue, COVID hit. However, at roughly the same time they developed what would be their game-changing ready-to-drink product at the request of schools: Twist & Go (T&G).

T&G is a premeasured, prepackaged smoothie that was created in collaboration with the USDA. As people say, “Schools have the healthiest trashcans”, and T&G solves that problem. T&G has no direct competition, rather they compete with adjacent healthy foods like bananas or yogurt. While kids throw those tasteless foods away, they love T&G, and this has led Barfresh to quickly capture double-digit market share in a few years despite massive operational hurdles.

This is in part because kids aren’t the only ones who love the product, schools do as well. If more kids participate in the breakfast program, the school gets more funding, and USDA breakfast products that meet certain requirements are reimbursed.

At one school system, the district reported a 15-40% increase in breakfast participation rates after they started selling T&G, and it’s likely most school systems will experience some sort of uplift. Ultimately, it’s a win-win relationship: kids get a tasty drink, parents are happy their children are well-fed, health directors are happy that kids are eating better, and schools improve their metrics to receive more funding. Since Barfresh is the only company providing these healthy but tasty breakfast items, they’ve rapidly won deals since the day they launched T&G and continue to gain share.  

Roughly 1 year after launch, T&G more than offset a COVID induced decline in Barfresh’s core business and grew to 66% of a record 6.7M in sales. While 2022 would experience strong growth, in Q3 their main bottler delivered faulty product and had to be dropped entirely. Overnight, 60% of their supply disappeared. Their revenues plummeted, but a quick shift to cartons as well as new customers in other non-education channels resulted in roughly flat revenues from 2022-2023. However, entering 2024’s back to school season, they have significantly increased production capacity and over tripled the number of schools they serve. Management is guiding for a blockbuster year both in terms of profitability and growth, despite a milk carton shortage in the first half of 2024.

Recently, management presented at a microcap conference and reiterated their plan to grow to 100M+ in revenue in 3-5 years that they envisioned before the supply chain struggles. Here’s a picture and my thoughts on each growth pillar.

• Key Education Accounts: This bidding season alone Barfresh landed 3,000 new schools and expects to double that before bidding ends. I think it’s easily possible for them to land some of the bigger accounts. They currently serve Los Angeles (2^nd biggest school district in America), so they’ve demonstrated their ability to serve larger clients. Furthermore, management said they’re already working with these districts to develop custom products. I think there’s a high chance they will land these accounts and there’s even room for further upside.

• New Markets/Products: Their audience is a captive audience. Once they’re in the door with a school, they can easily present new products to cross sell. New markets should be equally receptive since the new markets are still through the education channel. In a recent conference, management stated they have multiple products in the pipeline. Cross selling and expansion into different regions should materialize without difficulty.

• Penetration in Existing Regions: Expansion in certain states was slower than expected due to operational issues and a small salesforce, but those problems are now gone. They claim schools are just waiting for them to come back with bottled products and that they are rapidly winning new accounts. Additionally, they have significantly expanded their brokerage network and sales team, so this opportunity is likely to materialize.

• QSR: While any potential QSR talks were on hold amidst the bottling crisis, it’s likely they will reengage with major QSR brands to get into stores nationwide. This could be an overnight double in revenue when it does happen, though it will likely take a year or two. This would be a farther out opportunity but should be attainable.

• Retail Launch: Further down the road, management has indicated that they may bring T&G to retail channels. It could be like Biscoff, where their reputation carries outside the traditional channel and leads to an extremely simple retail launch. This would be at least 2 years out but is also possible.

Of the expansion opportunities, $50M of the revenue growth comes purely from expansion in the education channel, which they’ve already proven to be attainable through recent account wins. They released PRs saying they are winning new school districts, increasing sales in existing schools, and launching new products to cross sell. Beyond the 3–5-year plan, there is room for even further upside in the education channel by continuing these same initiatives. Furthermore, school lunches represent a 5-10x greater market than school breakfasts (where they currently are) and could push the education channel alone above $100M in sales.

Even though Barfresh launched T&G in peak COVID, lost their biggest manufacturer, experienced fluctuating commodity prices, and faced a milk carton shortage, the company is still at record revenues and on the verge of inflecting to profitability. That’s a testament to how strong T&G is, and how ripe the school meal industry is for disruption. Considering they are the only ones innovating in this the otherwise stagnant school meal space, I believe this channel alone is worth multiples of the current market cap.

While the primary focus of this writeup is the education channel since that industry represents the largest revenue opportunity, they are also successful in the entertainment and military industry. They are approved to be sold in any military base and are pursuing deals to be served regularly to 1.3M active troops 3 meals a day. Furthermore, they are sold at tourist attractions and other entertainment locations and expect this channel to recover to pre-covid metrics. Therefore, while they have considerable momentum in their main market, there are opportunities that present further upside in other channels.

The real question is whether management can solve operational problems and successfully grow capacity. In recent months, they’ve hired a head of the supply chain with a solid resume, expanded capacity with existing partners, and found a new high-capacity bottler. The bottling issues were isolated from a single supplier, so if no other one-off issues occur, Barfresh should have the capacity to meet this year’s demand and scale up to a far higher run rate with ease.

At the same time, the operational issues are most likely why this opportunity exists in the first place. One week ago, the CEO said they haven’t focused on investor relations much and have instead focused on solving internal issues. It’s likely that management is still being too conservative with guidance and investor outreach since they have a history of overpromising and underdelivering.

Market and Competition:

Barfresh has no direct competition in its education channel. Its competition is other healthy foods like raw fruits or plain yogurts. There are barriers to entry in the school meals industry. Once schools get an item on their menu that kids enjoy and meet the USDA requirements, schools are highly unlikely to remove it unless the product is defective according to management. Anecdotally, my parents sell software and hardware to school districts, and most accounts are decades old. Even if competitors offer more competitive pricing or better products, schools are still highly unlikely to switch. Furthermore, management claims that their supply chain is optimized around transporting frozen yogurt products and their proprietary formula allows for a 2-year shelf life.

While competition could emerge, they would have to collaborate with the USDA to develop a product that meets a very specific profile, and this would take at least 1-2 years. Furthermore, since Barfresh is so small, it’s likely that the product/idea isn’t even on the radars of larger players yet. This essentially allows Barfresh to completely dominate the education channel in the short run and win over tens of thousands of schools that will be reluctant to switch away in the long run.

In its other revenue channels (entertainment, QSR) it competes with similar products, but is slightly differentiated due to its patented technology that makes equally sized portions quick and easy. In the military channel it has some advantages due to its government approval but is yet to be adopted on a large scale.

Catalysts:

The largest catalyst will be Q3 earnings where they should blow through estimates and be extremely profitable. The few analysts that do cover Barfresh have significantly underestimated their earnings power for the second half of the year. I expect them to be profitable and growth revenue to nearly $20M for FY 2024.

Furthermore, any major account win in the other channels could increase revenues by $25M+ overnight and send the stock up to multiples of its current price. While there is nothing likely to happen in the immediate future, this is a potential catalyst 1 year out.

Finally, they filed a lawsuit against their manufacturer for messing up the product that could be worth a good bit. While they asked for a minimum of $20M, these cases often settle for just a few million dollars or less. Regardless, extra cash would help fund the business and reduce dilution risk.   

Price Target:

Management doesn’t disclose too much about their business in terms of revenue breakdowns or guidance. All we know is that 2024 is going to be a record year by a longshot in terms of revenues and earnings. I pieced together some numbers based on earnings calls and my own estimates.

In 2021, the company had ~2,000 schools, and many of these deals weren’t even at their full run rate. Educational revenue was roughly $4.7M that year. They lost at least 60% of these customers when the supply chain issues hit, but they think that many could be reacquired now that they have another manufacturer. In the last 6 months alone, they announced 4,000 new schools and expect to land at least 7,000 total before back to school starts. This would bring the total number of schools served to 10,000, or 5x 2021 numbers. Furthermore, they can now start selling bottled smoothies again to existing customers.

Given that management expected $4.5M in revenue for Q42022 before the issues hit, Q4 is slower than Q3, and they expected a $20-$25M run rate exiting 2022, we can vaguely formulate a baseline for our estimates. With roughly 3x the number of schools being served from 2022, non-education channels ramping back up, increased penetration with the relaunch of their most popular offering (bottled smoothies) in max capacity, and the launch of other products, I expect Q3 revenue to be close to $8M compared to the current analyst estimate of $3.7M. For Q4, I expect $6M. I think Q2 should be around $3M bringing FY2024 revenue to ~$20M, and on a 38.5% gross margin and $5.5M in SG&A, we get ~$2.2M in net income. More importantly, they will exit 2024 at a run rate far above where they are today. I estimate 2025 revenue will be at least $30M and could very well be closer to $50M.

I can only make vague guesses on how much the company will earn, but it should be clear that barring any supply chain disasters this company can easily earn out its enterprise value in 3 years. Furthermore, this isn’t your average CPG company. With many barriers to entry and a first mover advantage, it should trade at a hefty premium. If they can reach $30M in revenue at a 37% gross margin, they can easily trade at 20x earnings of ~5M which would be a $100M EV or >300% upside. If they reached $50M, they could easily net over $10M in profit resulting in an EV of $200M or ~700% upside. In the long run, if they execute and reach $22M in EBITDA for 2026, the company could easily be worth >$500M. Ultimately, there’s a lot of uncertainty and variance, but at these prices, I’m happy to take the risk.   

Management and Shareholders:

Management includes the CEO and founder who owns >10% of the stock and is compensated 400k annually. The CFO is somewhat overqualified coming from a 1B sales company. Executives have a number of far OTM options and can really only cash out if the stock price goes higher.

In terms of the board, there is shareholder representation from an activist who won a spot in 2020. Additionally, Unibel (a large CPG conglomerate) owns roughly 12.4% of the company and has a board seat, furthering aligning management with shareholders. Overall, everyone on the board either has a strong skillset or owns a lot of stock, making shareholder alignment very strong here.

Risks:

Regulation: While there is bipartisan support for free/healthy school meals, there is a risk that the USDA will change its requirements or that school lunches will no longer be free in key states for Barfresh. This would significantly hurt their sales. Considering the USDA changed the requirements for T&G specifically and school lunches are known for being complete garbage and in need of reform, I think this risk is relatively unlikely. While it still presents a risk, overall, regulation should be a strong tailwind for Barfresh as parents and schools continue to push for free, healthy, tasty food products at school.

Operational Execution: This executive team has encountered copious operational issues in the past 5 years. There’s no guarantee this will ever not be the case. With their balance sheet, one more mistake could mean dilution at low prices which would significantly reduce upside. Operational risk is the largest risk factor in this thesis.

Dilution:  While management has indicated a capital raise is unlikely, it’s still possible. Notably, they won’t need capex to expand since production is 3^rd party, working capital is low, and their cash conversion cycle is low. Even in the case of a raise, it would likely be a private placement for just a few million dollars.

Conclusion:

Barfresh is disrupting the school meal industry and is poised to grow rapidly over the next 5 years, but no one seems to notice. Despite being at the verge of inflection, the stock is at historical lows. If management executes their expansion plan and reaches $100M in sales, this stock could 15x by 2026, and still leave room for further growth. With multiple catalysts for rerating and a credible path to long-term, sustainable growth, Barfresh is one of my largest positions, and one I hope to hold for multiple years.

Disclaimer:

I own shares which I acquired from prices ranging from $1.46 to $2.30. Shares are relatively illiquid. When I first wrote this up it was $1.40, and even buying a few thousand shares pushed the price up 30% immediately, so be careful if you do trade here. As always, I will disclose any material changes to my position (>5% of my holding). To date, I have not sold shares in $SBBC or $LSF. I sold a few shares of $SOWG to pay for a personal expense (<5% of my position). This post reflects my own thoughts only and should not be used as a basis for your own financial decisions.