VITL - Vital Farms: Long-Term Secular Growth Play

2023-04-18 19:15:10 ET

Summary

• Vital Farms, Inc. has seen long-term pressure on its shares.
• In the meantime, the company has seen solid top line sales growth, amidst largely non-existing margins.
• For the current year, some margin gains are anticipated.
• Given the potential, growth, and margin expansion, I am warming up to Vital Farms, Inc. here.

In April 2021, I concluded that shares of Vital Farms, Inc. ( VITL ) looked like a fair bet. The company focused on a social mission which resonated well with the Zeitgeist at the time, as the 2021 guidance was a bit underwhelming amidst difficult comparables and feed price inflation.

With shares down a lot from their highs, appeal was emerging, yet I was not willing to bet the farm yet.

Some Background

Vital Farms, Inc. was founded in 2007 with a mission to bring ethically produced food to the table, being better for people, animals, and the planet. The company has grown to become a leading national consumer brand within the pasture-raised eggs market, working with over 300 family farms with products now being sold in more than 22,000 stores.

The company went public in July 2020 as a pure play on ethical farming. This made the positioning interesting, at the time focusing on a $5.4 billion U.S. shell eggs market, as this has risen amidst inflation and increasing volumes. Growth of this market and adjacent markets (such as pasture raised butter, liquid whole eggs and hard-boiled eggs) made the addressable market by now come in around ten billion.

The company went public at $22 per share. The 39 million shares outstanding awarded the company a $1.4 billion equity valuation at $36 per share, although that included a hundred million dollars net cash position. The company had tripled sales from $45 million in 2014 to $141 million in 2019 as operating margins were posted at around 2%, equal to $3.3 million in dollar terms.

First quarter sales for 2020 rose 44% to $47.6 million, as operating profits fell to $2.9 million. The company guided for 80% sales growth in the second quarter, with revenues seen around $58 million as operating profits were seen at $8.2 million (at the time of the IPO). At that run rate, this worked down to a $230 million run rate in sales and $33 million in operating earnings, valuing the business at 5 times sales and 50 times earnings at the time of the initial offering.

Second quarter sales for 2020 eventually came in around $59 million and operating profits came in as high as $9 million, yet momentum cooled down quickly. Third quarter sales fell to $53 million and change as operating profits fell to just $2 million. Fourth quarter sales came in at $54 million as the company posted a $2 million loss in seasonally a softer quarter for the business.

By April 2021, the nearly 40 million shares traded down to $22, as the resulting enterprise valuation came in around $770 million. The outlook for 2021 was a bit underwhelming, with sales seen around a quarter of a billion, up 15-18% from 2020. EBITDA was seen at just $6-$8 million as that marked ten million deleveraging from 2020, revealing no realistic earnings seen in 2021. This came amidst absorption of input price inflation, although the underlying market kept growing.

I was turning a bit more upbeat on the shares here, but the issue is that earnings were non-existing in 2021 as relative sales multiples came down a lot.

Struggling

Over the past two years, shares of Vital Farms, Inc. have fallen from $22 to $13 and change now, as shares even hit a low around $8 per share last summer. Forwarding to March 2022 the company did post its 2021 results with revenues up more than 21% to $261 million, comfortably ahead of the initial guidance for the year. The company saw EBITDA fall from $16.8 million to $8.0 million as net earnings came in at $2.4 million. This was largely in line with the original guidance and while the company saw revenue growth accelerate towards the end of the year, margins saw more pressure.

For the year 2022, the company guided for revenues to rise further to $340 million, or more, up 30% from the year before. Adjusted EBITDA was seen at $13 million or more, marking relatively modest margin expansion, although that this number comes ahead of rising depreciation charges and stock-based compensation expenses.

Forwarding to March of this year, the company posted full year sales at $362 million, aided by inflationary pressures. Adjusted EBITDA rose to $16 million, but net earnings only came in at a million and change, as GAAP earnings were impacted by some smaller one-time charges.

Net cash is down to $78 million, amidst elevated net capital investments. The 43 million shares now give the company a $560 million equity valuation, for an enterprise valuation of less than half a billion. This makes that the sales multiple has fallen to about 1.5 times, as no realistic earnings are posted yet, at least not in 2022.

The 2023 guidance look a bit more compelling with revenues seen in excess of $450 million. More important is that EBITDA is seen north of $30 million, for margins of 6.7% or more, up some 230 basis points or more from 2022. Assuming flattish depreciation charges and stock-based compensation expenses, that could reveal some real earnings to be expected this year. That said, margins are slim, still translating into high forward earnings multiples.

And Now?

With the valuation of Vital having fallen towards nearly 1 times forward sales, the multiple has come down a great deal. At the same time, the company sees very strong growth, and expects some leverage on margins as well this year. Hence, I see potential for operating earnings to rise to $10 million this year, still working down to a 50 times operating earnings multiple.

That being said, the positioning is very strong as the company sees continued strong growth in a strong secular trend, anticipating margin expansion over time as well. Given these dynamics, I am a lot more upbeat on Vital here, although that there are risks relating to affordability, as well as idiosyncratic risks related to animal diseases, among others.

All in all, I am getting more upbeat on the prospects for Vital Farms, Inc. shares here, looking to average down further. I am quite upbeat on the shares here, albeit that I have been too early with my optimism in the past.

For further details see: