COCO - Vita Coco Appears Positioned For Growth As Recession Looms

Summary

• The Vita Coco Company went public in October 2021, raising approximately $173 million for the company and selling shareholders.
• The firm sells a variety of coconut-based healthy beverage products worldwide.
• COCO has grown revenue but has felt the negative effects of inflation on its products and cost structure.
• While the company appears positioned to secure further growth, I'm cautious about the effect of a 2023 recession on its growth trajectory.
• I'm on Hold for COCO in the near term, but the stock is worth putting on a watch list for future consideration.

A Quick Take On The Vita Coco Company

The Vita Coco Company ( COCO ) went public in October 2021, raising approximately $172.5 million in gross proceeds for the company and selling stockholders from an IPO that priced at $15.00 per share.

The firm sells a variety of coconut-based beverage products to consumers worldwide.

Some optimistic investors may see value at the current price level for COCO's stock, but I'm more cautious given the expectations of many for a recession in 2023.

I'm on Hold for COCO in the near term, but the stock is definitely worth putting on a watch list for future consideration.

Vita Coco Overview

New York, New York-based Vita Coco was founded as a public benefit corporation to develop and market coconut-derived products that serve as functional beverages.

Management is headed by co-founder, Chairman and co-CEO Michael Kirban, who has been with the firm since inception and was previously co-founder and is still a board member of Software Answers.

The company's primary offerings include:

The firm distributes its products through a wide variety of retail, ecommerce, DTC, foodservice and related channels in North America, Europe and Asia.

Vita Coco's Market & Competition

According to a 2020 market research report by Grand View Research, the global coconut water market was an estimated $4.27 billion in 2019 and is forecast to reach $16.4 billion by 2027.

This represents a forecast CAGR of 16.1% from 2020 to 2027.

The main drivers for this expected growth are a growth in the number of consumers seeking nutritional and functional drinks to retain a healthier lifestyle and a reduction in the consumption of carbonated and sugary beverages.

Also, below is a chart showing the historical and projected future growth trajectory of the U.S. coconut water market, from 2016 to 2019, by product type:

Major competitive or other industry participants include:

• Coca Cola

• PepsiCo

• Nestle S.A.

• Goya

• Harmless Harvest

• BodyArmour

• Bai

• Monster

• Red Bull

• Bang

• Ocean Spray

• Bubly and Bai

• Others

Vita Coco's Recent Financial Performance

• Total revenue by quarter has risen according to the following chart:

• Gross profit by quarter has followed a similar trajectory:

• Selling, G&A expenses as a percentage of total revenue by quarter have proceeded as the chart shows here:

• Operating income by quarter has dropped in recent quarters:

• Earnings per share (Diluted) have also dropped recently:

(All data in above charts is GAAP)

Since its IPO, COCO's stock price has fallen 26.9% vs. the U.S. S&P 500 index' drop of around 16.9%, as the chart below indicates:

Valuation And Other Metrics For Vita Coco

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Commentary On Vita Coco

In its last earnings call ( Source - Seeking Alpha), covering Q2 2022's results, management highlighted continued demand growth for its coconut beverages from 'multicultural consumers.'

The firm will also launch Vita Coco Spiked in early 2023 in collaboration with Diageo's Captain Morgan Rum brand in an effort to expand the firm's brand into alcoholic beverages.

Management gained an additional 11,000 points of retail distribution in the U.S. over the trailing twelve months and has a goal of 25,000 net new retail points by the end of 2022.

As to its financial results, topline revenue rose 13% year-over-year, with management citing 'undisputed category leadership with 51% value share.'

Gross margins improved as the firm pushed through price increases and saw transportation cost inflation stabilize.

Operating income returned to positive territory after two quarters of negative results, a positive development.

For the balance sheet, the company ended the quarter with $16 million in cash and $22 million in debt. Its accounts receivable have increased 'significantly' due to normal business seasonality.

Over the trailing twelve months, free cash used was $35.1 million, of which CapEx accounted for $1.3 million of cash used. Notably, free cash used has been increasing as the company has grown revenue.

Looking ahead, for the full year of 2022, management expects topline revenue growth of 18% at the midpoint of the range and adjusted EBITDA of $29.5 million at the midpoint. Adjusted figures usually exclude stock-based compensation and one-time items.

Regarding valuation, the market is valuing COCO at an EV/Sales of approximately 1.4x.

My discounted cash flow analysis is shown below:

My DCF indicates that COCO may be undervalued at its current price level.

The primary risks to the company's outlook are continued inflationary pressures and the potential for consumers to begin substituting out of its products.

A potential upside catalyst to the stock could include a tapering of interest rate rises as we lap previous high inflation base effects.

Some optimistic investors may see value at the current price level for COCO's stock, but I'm more cautious given the expectations of many for a recession in 2023.

So, I'm Neutral on COCO for the near term, but the stock is definitely worth putting on a watch list for future consideration.

For further details see: