VITL - Vital Farms: Should Have No Issue Beating FY23 EBITDA Guidance

2023-06-07 11:05:07 ET

Summary

• Vital Farms showed strong underlying momentum with increased revenue and improved EBITDA margin.
• Despite normalization of egg supply, I expect VITL to continue growing as customers recognize its value proposition.
• Risks include tougher year-over-year comparisons and potential margin pressures.

Overview

I reiterate my buy rating for Vital Farms ( VITL ), a producer of pasture-raised eggs that offer shoppers a high-quality alternative to mass-produced factory eggs from a collection of local, independent family farms. I believe the stock is now much more attractive on a valuation basis vs when I wrote about it in January this year. I still believe the consumption of natural food is increasingly becoming a norm, and VITL is well positioned to take advantage of this. The highlight has been the very strong 1Q23, where VITL saw 55% revenue growth and growth in EBITDA margin to 10.5%, which was ~600bps improvement sequentially. What was interesting is that management reiterated its FY23 guidance for more than $30 million EBITDA which it has already achieved $12.6 million in 1Q23. As such, I believe management is being over conservative in its guidance, and if 2Q23 performance also comes in strong, I expect management to raise its guidance, thereby giving investors that are still being conservative in the market the “official clearance” to increase their estimates.

Underlying performance is strong

The fact that VITL can print at 54.7% growth is an amazing feat as it represents an acceleration from previous quarters of 40+% growth. In my opinion, this growth might have also come as a surprise to many investors as egg prices have been crashing recently, and logically, one would expect VITL to be impacted as well. Clearly, that is not the case as the strong growth was driven by both volume and price. Granted that a large part of the growth can be attributed to the industry egg shortage due to the avian influenza, I believe it has pulled forward the adoption curve for VITL products. For instance, the industry Avian supply issues created accelerated product trial for VITL. As for pricing, VITL raised prices last year along with the broader industry and has continue to see the benefits from easy comps, which I expect to lap in the coming quarters.

Looking ahead, despite the normalization of supply, I expect VITL to continue growing positively as its customers look to continue diversifying their portfolio in case another supply shock hits them again. As the underlying customers recognizes the value proposition and advantages of holding VITL SKUs, I also expect VITL to gain more distribution rights in its distribution channels, especially more SKU depth, which will be the powerful long-term drivers of growth. All of these would translate easily to a top line growth of 25%, driving revenue to over $450 million, which is in line with management guidance. And in the longer term, if VITL can continue with its strong execution of convincing consumers that they can enjoy a similar experience with pasture-raised eggs, while driving down costs(through scale from number of connected family-farms), I see a potential for VITL to tap into the large consumer market for eggs. At that point in time, VITL could be seen as the market leader with well-established national distribution channels in place to capture share as the wave of majority adopters (consumers) comes into the industry. With that, VITL could also venture into other refrigerated categories in dairy / poultry that would further extend its TAM and growth runway.

Guidance

The interesting part about 1Q23 results is that management maintained its FY23 guidance of $450 million in revenue and EBITDA of more than $30 million. As for revenue guidance, it does imply a slowdown in revenue which I think is fair as supply is normalizing. But for adj. EBITDA, as I mentioned above, 1Q23 adj. EBITDA already represented a large chunk of the $30 million ($12 million in 1Q23), which makes meeting guidance as easy feat unless there are some operational screw up. I am confident that management will be “forced” to upgrade their guidance as EBITDA inches closer to $30 million before year end. In my opinion, management has sort of hinted at this as they admitted the guidance is conservative, and they are remaining prudent considering it is early in the year.

Valuation

As the valuation paradigm for VITL will start to switch from a revenue basis to EBITDA basis, I have updated my model to reflect this. As I mentioned, I am very positive that VITL will be able to beat its $30 million guidance by a fair a bit (~15% in my model), and margin should continue to expand as the company scales to larger revenue size. Given the lack of peer comparable that are profitable, I adopted an alternative approach which is to benchmark it against the S&P500 which trades at 12x forward EBITDA today. Given that VITAL is expected to grow faster than the market from a revenue perspective, and even faster from an EBITDA perspective, I assumed that it would trade at the same level, at least.

Risks

In my opinion, a potential risk that might hurt the stock is when VITL financial starts to comp against the tough 2H22 comp which benefited from the supply shock. In addition, margins might not expand as much as I expected as the benefit of high pricing due to the supply situation start taper off in the coming quarters. As such, there is a credible risk that 2H23 performance might be weaker than what the market expect, thereby putting some headline risk to the stock.

Conclusion

I maintain my buy rating for VITL based on several factors. The company has shown strong underlying momentum with a significant increase in revenue and improved EBITDA margin. The growth in a challenging market demonstrates the value and demand for VITL's high-quality alternative to factory eggs. Despite the normalization of egg supply, I expect VITL to continue growing as customers recognize its value proposition. In my opinion, management's conservative guidance also suggests the potential for an upgrade as the year progresses. However, there are risks to consider, including tougher year-over-year comparisons and potential margin pressures. Overall, considering the company's strong performance and favorable market conditions, VITL appears well-positioned for continued growth.

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