COCO - Vita Coco: Sales And Margin Momentum To Continue

2023-07-19 00:15:41 ET

Summary

• Vita Coco, a leading beverage company, is expected to continue its strong performance due to increased distribution of new products and improved margins from lower ocean freight costs.
• The company, which has a 50% market share in the US coconut water space, is expanding its distribution in convenience stores and food service, and introducing new products such as Vita CocoSpiked, an alcoholic beverage.
• Despite potential risks such as changing consumer preferences and new competition, Vita Coco's valuation is reasonable given its growth prospects and the expected recovery of its margins in 2023.

Despite its strong performance this year, Vita Coco ( COCO ) looks poised to continue to perform well as the company benefits from increased distribution of newer product offerings and improved margins from lower ocean freight costs.

Company Profile

COCO is a beverage company with operations both in the U.S. and abroad. Over 91% of its sales in 2022 were from coconut water.

The company's namesake brand is a category leader in the coconut water space, with an approximately 50% market share in the U.S. The brand also sells a variety of other coconut based products, including a pressed version, coconut juice, coconut oil, and a hydration drink mix. It has also introduced a Vita CocoSpiked with Captain Morgan alcoholic beverage in collaboration with Diageo ( DEO ).

In addition to its namesake brand, the company also supplies coconut water and coconut oil to private label brands. It also owns energy drink brand Runa, whose key ingredient is an Amazon jungle plants called guayusa. In addition, it owns purified water brand Ever & Ever, which is packaged only in aluminum bottles. It also has the PWR LIFT brand, which offers a protein-infused sports drink with electrolytes designed to be used post-workout.

Opportunities & Risks

COCO has been seeing solid sales, with revenue up 13% in 2022, led by Vita Coconut Water sales growth of 18%. This continued in Q1 with sales up 14% and Vita Coconut Water sales growth of 17%. With 52% market share in Q1, category growth as a whole is important for the company.

Most data forecast firms are predicting the category to see around a 15% CAGR over the next several year. The increased consumption is largely due to the associated health benefits touted with the drink, which consumers can drink by itself or as part of drink concoction, such as a smoothie. COCO management notes that coconut water penetration in the U.S. is only 22%, compared to 55% from cranberry juice and over 80% for orange juice.

Distribution increases, especially in some of its emerging categories, also is an opportunity. For emerging beverage brands, distribution is always one of the biggest keys, as the more shelf space and locations a product can be found the better for sales. Right now, the company is looking to increase distribution in the areas of convenience stores and food service. It also looking to gain more distribution for its canned coconut juice products, its farmers' organic offering and its shelf-stable Vita Coco coconut milk dairy alternative.

Its farmer organic offerings come in a shelf stable package and are sold at a premium price to COCO's regular SKUs. The company is doing a broader national rollout of these offerings this year. Meanwhile, it also rolling out its Vita Coco Coconut Juice cans nationally in convenience stores this year, after a successful regional rollout last year.

It's also trying to bring Vita Coco Pressed and Vita Coco Pineapple to the central U.S., where it says its products are under-indexed and where these offerings could be a good introduction to the category for these consumers. It also just launched an alcoholic beverage in collaboration with DEO in Q1.

The company has also been offering its products in different multipack variations to help drive uptake.

Discussing these initiatives on its Q1 earnings call, Co-CEO Michael Kirban said:

Our expansion of multipack availability in the United States is driving most of our growth in the relevant channels with strong growth from 4-pack 500 ml and the expansion of our 12-pack 330 ml distribution. Encouragingly, we're seeing relatively limited cannibalization of single serves by the multi-packs. Our distribution gains for Vita Coco Farmers Organic are providing consumers with a new premium option in the shelf stable set and adding nicely to our overall scan sales. Our expansion of Vita Coco coconut juice in can to broader convenience store distribution is progressing, and we have planned summer marketing and sales activities to ensure trial and visibility for this initiative. The retail ACV distribution measures show that we still have lots of room for distribution growth on all of these packs. Finally, our previously announced collaboration with Diageo, Vita Coco spiked, launched during the quarter. It is too early to repeat purchase rates, but everything appears on track with our and Diageo's expectations. We believe that this and other opportunities to support Vita Coco Coconut Water as an on-premise or at-home mixer are important initiatives to generate further trial of coconut water and expand coconut water consumption occasions."

Margin recovery is another big part of the COCO story. Coconuts are not grown in mass in the mainland U.S., so all of its product is imported by ocean freight. With the pandemic and global supply chain issues, ocean freight rates skyrocketed a few years ago, and are now just starting to normalize. That will be a big boost to COCO's margins, as evidenced in Q1, where gross margins were around 31%, an improvement from 20% a year ago and 24% the prior quarter.

When it comes to risks, there isn't as much differentiation with regular coconut water as there would be with an energy drink or soda. Thus, price, brand recognition, and scale all play more of roll versus a taste differentiation. However, competition is coming in and trying to differentiate. You are seeing this with things like Cocovibe, a flavored drink on coconut water and fruit juices, or the flavored coconut water being offered by Eliya in glass bottles.

Other risks include whether consumer consumption forecasts for coconut water live up to forecasts, if consumer preferences change, and if freight costs reverse again. Coconut water also isn't cheap, so there could be some less demand if the economy weakens, or consumers could trade down to private label.

Valuation

COCO trades around 24.5x the 2023 consensus EBITDA of $56.3 million and 18.6x the 2024 consensus of $74 million.

It trades at a forward PE of 37.4x the 2023 consensus of 67 cents. Based on 2024 analyst estimates of 86 cents, it trades at 29.2x.

COCO is projected to growth its revenue between 11-12% over the next few years.

It's difficult to find a good comparison for COCO. Monster Beverage (MNST) has a slightly higher revenue growth rate and trades at a slightly higher multiple. However, it doesn't have the same margin recovery or EBITDA growth story as COCO.

Conclusion

Growth stories in the consumer staples space usually don't come cheap, so the valuation of COCO given its growth is reasonable. The company has opportunities to continue to grow with the market, as well as with newer products and increased distribution for these newer offerings. At the same time, 2023 should show a nice margin recovery story as ocean freight costs have come down.

While COCO has been a huge winner in the market this year, I think its momentum should continue. As such, I rate the stock a "Buy."

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