VITL - Vital Farms: A Healthier Future

2024-01-07 09:50:26 ET

Summary

• Vital Farms is a long-term secular growth play in the ethical food industry.
• The company went public in 2020 and has seen continued volume and sales growth over time.
• After margins reverted after the pandemic-fueled momentum, real margins gains have been seen in 2023, providing comfort into the future.

In the spring of last year, I called Vital Farms ( VITL ) a long term secular growth play, one which has seen quite some pressure on its shares. Such pressure observed in the share price, in combination with continued sales growth, has narrowed sales multiple amidst rather non-existing margins, although some progress was anticipated on this front in 2023.

Given the continued growth and potential for margin expansion, I was gradually warming up to shares of Vital in their mid-teens. While shares trade at similar levels as they did in the spring, the operating performance is better than anticipated, creating a brighter future for all stakeholders.

About Vital

Founded in 2007, Vital Farms is based on the mission to bring ethnically produced food to the table, being better for people, animals and the planet. Over time the company has become a national consumer brand within the pasture-raised eggs market, as the business works with some 300 family farms, with eggs sold in over 20,000 stores, with these numbers continuing to grow over time.

The company timed its public offering in July 2020 well, as a pure play on ethical farming, focusing on a +$5 billion US shell eggs market. With growth driven by inflation and volumes, as well as adjacent markets such as pasture raised butter and hard-boiled eggs, the addressable markets grew to as much as ten billion.

Vital went public at $22 per share as shares rose to the $36 mark on the first day of trading, granting the business a $1.3 billion enterprise valuation. This was based on a business which grew sales from $45 million in 2014 to $141 million in 2019, although that operating margins came in at just 2%.

The company saw incredible momentum at the time of the IPO, seeing 80% sales growth for the second quarter, and double-digit operating margins. While an annualized $230 million sales number still translated into demanding sales and earnings multiples, momentum was impressive.

After posting second quarter sales at $59 million, sales and margins reversed in the second half of 2020, with revenues reported at $53 and $54 million in the third and fourth quarter, respectively, accompanied by substantial pressure on margins. This slower growth quickly put pressure on the shares, which fell to the $10 mark in 2022.

While 2021 sales did grow by 21% to $261 million, EBITDA was cut in half to $8 million, weighing on already slim margins. 2022 revenues rose at a solid pace to $362 million, aided by inflationary pressures, with EBITDA improving to $16 million, better than the year before, but still revealing no realistic earnings.

Trading at $13 in the spring of 2023, the enterprise valuation came in at less than half a billion, reducing the sales multiple to just 1.5 times, with no realistic earnings seen. Nonetheless, continued growth was seen, with 2023 sales expected to improve to a minimum of $450 million. More important was that a minimum of $30 million EBITDA guidance suggested a more than two point improvement from the year before, finally resulting in some realistic earnings.

And Now?

On the back of the optimism, I added a bit more to my stake at $12 per share in the weeks which followed as shares fell to the $10 mark over the summer, before joining the market rally towards year-end, now trading at $15 per share.

In May, Vital posted a 55% increase in first quarter sales to $119 million, as adjusted EBITDA came in at nearly $14 million. Much of the growth was driven by pricing, but a 26% increase in volumes was pretty solid as well. Operating earnings came in at nearly $11 million, with net earnings of $7 million, coming in at $0.16 per share on a fully diluted basis of 43 million shares. Seemingly out of the blue, with the worst inflationary pressures subsiding, the company turned solidly profitable overnight.

Over the summer, Vital posted a 28% increase in second quarter sales to $106 million, with prices down on a sequential basis and volumes up a mere 6%. Superior margins were reported with operating earnings of $8 million, resulting in earnings of another $0.15 per share. Despite the lower pace of growth, the company hiked the full year sales guidance to at least $465 million, with EBITDA now seen above $35 million, as the company posted adjusted EBITDA of $25.2 million in the first half of the year.

In November, third quarter sales were reported up 20% to $110 million, with volumes growing by 13%, and operating earnings down to $5 million, with net earnings reported at $0.10 per share. The company hiked the full year EBITDA guidance to more than $40 million, after the performance so far for 2023 came in at $34 million and change.

Upbeat In The Long Haul

With 43 million shares still trading at $15, the near $650 million equity valuation includes about a hundred million in net cash, for a $550 million enterprise valuation, valuing the business at just over 1 times sales. Earnings now come in around half a dollar per share, as the valuation includes just over $2 per share in net cash, which makes that realistic earnings (multiples) are seen here.

Quantifying its ambitions, the company updated its long term targets, those which it set for 2027. In the coming four years, Vital aims to more than double revenues to over a billion, but more important is that it sees EBITDA margins around 12-14% at that time. That suggests about $120-$140 million in EBITDA. With D&A intensity seen around 2% of sales, that could imply $100-$120 million in operating earnings, resulting in potential net profits to the tune of $75-$90 million.

Given the net cash holdings and profitability, it seems that much of the growth could be self-financed by the business, as this could yield $1.75-$2.10 per share in earnings power by 2027, for a number roughly equal to $2 per share. A market multiple on such earnings might drive shares up to $40 per share, or even higher, but this requires some execution (of course).

Given all of this, I am definitely sharing my optimism again displayed in the spring of last year, as the company has notably raised the EBITDA guidance in a solid fashion, which bodes well for the business. Given all this, I am quite upbeat here on the long run, remaining a happy holder here in anticipation of a further re-rating over time.

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