AGRO - Westrock Coffee Company: A Taste Test Left Me Less Than Impressed

2023-04-03 13:04:14 ET

Summary

• Westrock Coffee Company, LLC is an interesting business with a focus on coffee and tea products.
• The firm has done well to grow its topline in recent years, and the markets it operates in are large and growing.
• But Westrock Coffee Company shares look pricey on an absolute basis, and there are likely better opportunities that can be had.

Coffee and tea are some of the most consumed beverages on the planet. The effects of the caffeine that they give, not to mention the other benefits that they offer, breathe life into countless millions every morning as they go about the daily grind. Given that the consumption of these drinks is almost universal across many countries, it should come as no surprise that there would be a number of players dedicated to providing these goods to customers.

One of the smaller companies that operate in this sphere is Westrock Coffee Company, LLC ( WEST ). With a market capitalization of only $916.2 million as of this writing, the company is not all that significant in terms of size. But management has done well to grow the business from a revenue perspective in recent years. If this growth continues in the long run, the picture for the company could be quite positive. Though at the moment, profitability issues do make it less than an ideal opportunity. On top of this, shares are a bit lofty. Due to these factors, I've decided to rate the company a "hold" for now. But if we see continued improvement moving forward, that picture could change.

Take a sip of some facts

According to one source , the global coffee industry should be worth around $495.5 billion this year. Of that, about $95.6 billion is generated in the U.S. On a global scale, it's estimated that the market will grow at about 4.5% per annum between now and 2025, taking the market opportunity up to $540.8 billion by that time. Such a large market undoubtedly is only possible with a large amount of product. In 2021, for instance, 167 million 60-kilogram bags of coffee were consumed across the globe.

The largest portion of this coffee came from Brazil. However, Vietnam, Columbia, and Indonesia are also major producers. In terms of overall consumption, the U.S. is the most dedicated country, importing over 99% of all of the coffee consumed in the nation from various countries across the globe. This does not mean that we are the largest consumers on a per capita basis. That designation belongs to Finland, with the average person they're consuming 12 kilograms of the product each year. That's over double the 5 kilograms that Americans consume.

Though not as large, the global tea market is also rather significant in size. Total revenue for 2023 associated with tea should be $247.2 billion, with growth over the next two years coming out to about 4.2% per annum. That should take the market up to roughly $268.5 billion. Not surprisingly, tea is much more popular in places like China than it is in the U.S. $111.8 billion worth of the product is consumed in China each year compared to only $32.2 billion involving the U.S. This does not mean that the U.S. does not consume a lot of the product. Each day, about 159 million Americans drink tea, with total tea consumption across the country totaling 3.8 billion gallons per year. In terms of the overall volume of beverages consumed, only water is more popular than tea.

A coffee and tea business

At its core, Westrock Coffee Company is a company that's dedicated to the production and sale of beverages like coffee and tea. With eight manufacturing facilities that it has, three of which are in the U.S., and a 524,000-square-foot extract and ready-to-drink facility being produced in Arkansas, the company has a great deal of infrastructure dedicated to these activities. To best understand the company, however, we should look at its two reporting segments. The first of these is the Beverage Solutions segment, which is involved in the production and packaging of branded and private-label coffee in bags, fractional packs, and single-serve cups. Its activities also include extract solutions that can be used in products like cold brew and ready-to-drink offerings. In addition to this, the company also has a segment called Sustainable Sourcing and Traceability. Through this, the company trades forward contracts on green coffee. Although this sounds like it might be a small portion of the pie, the segment actually accounts for 23.2% of the firm's overall revenue. That leaves the Beverage Solutions segment making up the rest.

There are other ways to look at the revenue picture of the company. For instance, about $569.5 million, or 65.6% of the company's overall revenue in 2022, involved its coffee and tea activities. This did not include the 21% of revenue associated with green coffee. Another $112.2 million, or 12.9% of sales, involved the production and sale of flavors, extracts, and ingredients. That left a modest $3.7 million in revenue associated with other miscellaneous activities. Geographically speaking, the firm is a global player. But no country other than the U.S. accounts for more than 10% of sales. Its domestic market, meanwhile, is responsible for a whopping 82.9% of revenue.

Over the past three years, the management team at Westrock Coffee Company has done a great job growing the company's top line. Revenue expanded from $550.8 million in 2020 to $867.9 million in 2022. From 2021 to 2022, the Beverage Solutions segment of the company saw sales climb about 24%, driven in large part by a 50% increase in single-serve cup volumes and a rise in underlying green coffee prices. Unfortunately, the company did see some weakness during this time, with roast and ground coffee products suffering a 7% sales decline and tea products reporting a 5% decline. A similar rise in revenue under its Sustainable Sourcing and Traceability segment was achieved from 2021 to 2022, thanks to a rise in the average sales price per pound of green coffee totaling 35%. This, management said, came even as sales volumes declined by 9%.

Even though revenue for the company has grown nicely, the firm still struggles to generate a profit. After seeing its net loss improve from $129.2 million in 2020 to $21.9 million in 2021, it then worsened in 2022, totaling $55.2 million. Operating cash flow during this time actually worsened, turning from negative $13.5 million to negative $56.6 million. Though, if we adjust for changes in working capital, it would have gone from negative $19.7 million to positive $15 million. And over that same window of time, EBITDA actually improved from $33.6 million to $60.1 million.

Management has been somewhat cryptic when it comes to forecasting 2023 financials. The only thing that they have said is that EBITDA should rise by between 10% and 25%, implying a reading of between $66 million and $75 million. If we assume a similar dollar increase to operating cash flow, we would anticipate a reading for it of $25.4 million for the year. Using these figures, I was able to value the business. On a price to adjusted operating cash flow basis, the company is trading at a forward multiple of 36.1. That's down from the 61.1 reading that we get using data from 2022. Meanwhile, the EV to EBITDA multiple for the company should be around 19.6. That compares favorably against the 23 reading that we get using data from 2022. Using the 2022 figures, I also compared the company to five similar businesses. On a price to operating cash flow basis, three of the five firms were cheaper than our prospect. When it comes to the EV to EBITDA approach, that number drops to two.

Takeaway

Right now, I must say that I find Westrock Coffee Company, LLC to be an intriguing company. The firm has benefited from a large and growing market, and it has done quite well to grow at a rapid pace despite severe competition. I fully suspect that revenue growth will continue for the foreseeable future. I also believe that bottom line results will also improve, though they are still far from great.

Relative to similar companies, Westrock Coffee Company, LLC looks to be more or less fairly valued. But on an absolute basis, I would say that the stock is quite pricey. Given these factors, I've decided to rate Westrock Coffee Company, LLC a "hold" at this time.

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