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Investment Thesis

Vital Farms (VITL) is poised for robust and continuous growth as the sustainable food industry continues to grow. Consumers are shifting awareness toward ethical practices and their diets toward sustainably grown food. With raising capital via the IPO, Vital Farms has access to more dry powder that would allow them to improve their scaling. Currently, only 2% of American Households currently buy Vital Farms, which gives the company room to obtain market share in relatively small industry.

Company Overview

Vital Farms is an Austin, Texas based ethical food company that provides pasture-raised eggs, butter, and ghee. It is the #1 brand for pasture-raised eggs, focusing on humane practices for hens and trying to elevate the industry’s standards for ethics. The company emphasizes conscious capitalism, using a network of 200 family farms to distribute products to 13,000+ grocery stores including Kroger and Whole Foods. In 2018, Pitchbook valued the company at $136 million. After its IPO, its market cap was $1.3 billion at the close-an 855% increase, respectively after 2 years.

Current & Recent Financials

As the chart below suggests, Vital Farms share price has already peaked within days of trading. However, with IPO’s and especially during this environment, I am not worried about it. Shares priced above the projected range ($15-$17) at $22, and have stayed above the initial pricing since the company went public.

ChartData by YCharts

Vital Farms’ Sales were $155 million for the year ended March 31, 2020. Vital Farms raised $125 million through its IPO, offering 7.8 million shares. In the current environment where companies are scrambling for liquidity, Vital Farms is in a good position with ample dry powder. Egg Central, which is the processing plant for all of Vital Farms’ eggs, is currently expanding. I believe this expansion will increase the company’s reach and processing speed-which should have nothing but positive impacts on future revenue.

Within 2 years, from FY17 to FY19, Vital Farms increased product carriers by 50%. The company is looking to add even more carriers in the future, by expanding the network of family farms and achieving more publicity. Although EPS declined from $0.40 to $0.16 YoY, this attributed largely to an increase in SG&A, which was used to increase awareness for the company.

Industry Overview

Vital Farms operates in the U.S. natural food and beverage industry, which is projected to generate $47.2 billion in 2019 according to SPINS LLC data. Consumer awareness of unethical practices has increased substantially in the past decade due to social media, films, and studies being done. The U.S. pasture-raised egg market in FY2019 has accounted for $177 million in retail sales, growing at a 31.7% CAGR from 2017-2019. Specialty egg market in FY19 accounted for $1 billion in retail sales and has grown at a CAGR of 7.5% from 2017 to 2019. Vital Farms’ 2% penetration of American households (2.5 million U.S. households) is relatively low, compared to the shell egg category of 93%, providing opportunity for growth. The U.S. processed egg market accounted for $2.7 billion in retail sales and U.S. butter market accounted for $3.3 billion in U.S. retail sales.

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As egg consumption in the U.S. increases, Vital Farms is set to profit off of the uptick in demand.

Source: United Egg Producers

Consumer Tastes Changing

Consumer demand has been shifting to more ethically and sustainably produced food. As of March 2020, Vital Farms is in the top 2 positions for egg brands by retail dollar sales, even though premium prices for eggs are 3x that of regular eggs.

Source: SEC Form S-1

In a study done in November of 2019, Vital Farms found that 31% of consumers surveyed are loyal to the brand and would not purchase another similar brand. For a relatively young company with comparatively smaller market share, these results are significant.

With documentaries and information about the practices related to commodity eggs becoming more widespread, consumers are shifting toward the alternative, cleaner choice. The pandemic has made consumers more health conscious in general, which translates largely to food awareness. The ethical and sustainable focus on the practices of Vital Farms will be positively correlated with this trend.

Another important product in its product line is ghee, coming from cows that roam the pastures. Vital Farms prides itself on the highest standard of treatment for all of its farm animals. Many consumers are shifting away from beef due to the treatment of cows in the majority of farms. Fairlife, owned by Coca-Cola (NYSE:KO) is one example in which the treatment that was widespread had extreme adverse effects on the business. I believe the positive image of Vital Farms will be another aspect attracting consumers to the brand.

As the sustainable food industry begins to grow, Vital Farms stands in an advantageous spot to capture customers switching from processed commodity products to ethically sourced eggs and butter.

Scaling Capability

Vital Farms partners with family farms in the Pasture Belt, where pasture-raised eggs can be produced year-round. The consistent production of eggs provides for consistent generation of cash flow. The network of 200 family farms in differing locations allows for an advantageous supply chain and scaling process. U.S. household penetration for pasture-raised shell eggs is relatively low at 2%, giving Vital Farms significant room for growth. Through social media and awareness campaigns, the company plans to educate consumers on their values and practices with the goal of generating more demand for their products, per the SEC filing. Considering the average American spends a median of 24 hours a week online (according to date from USC Annenberg), reaching customers online should not be a challenge for Vital Farms.

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The company also believes in growth within its current retail channel. By capturing shelf-space, which Vital Farms plans to do by increasing scaling, this grabs the attention of prospective customers. Food service is another channel Vital Farms is expanding in. Recent partnerships with companies such as Tacodeli, which uses Vital’s eggs in their tacos across 11 locations, as well as farmers markets and coffee shops, are just the beginnings of possibilities for the sustainable food company.

First Mover Advantage in the Industry

Vital Farms is looking to expand its product line soon, including egg bites and liquid whole eggs. Currently, egg bite products are most prevalent in Starbucks stores, which stated in the Earnings report that the products helped accelerate earnings growth and continues to see an upward trend. Other than Starbucks, almost no other company offers the product on the same scale, and no company (including Starbucks) offers sustainable and organic egg bites. With its anticipated roll out, the company stands in a unique position with first mover advantage.

Vital Farms is one of the very few public companies in the sustainable egg and butter space. I touch more on this in the Valuation section, but this gives the company a unique first-mover advantage. Such as the case with Beyond Meat and its ever-growing popularity, I predict a similar awareness explosion as time goes on and social media continues to be at the center of information dissemination.

Risks

The main risk for Vital Farms is the state of the environment and weather patterns. Although the pasture belt provides eggs year-round, effects on the availability of wheat for animal feed and volatile weather conditions could impact the belt. Even though the pasture belt produces the entirety of VITL’s product line currently, with hopes to expand to different areas in the future, the company will be better insulated.

Consumer tastes changing would adversely impact Vital Farms’ sales. The impact of the pandemic has decreased household income for most U.S. households in certain socioeconomic classes, decreasing disposable income. Vital Farms provides products at a premium price, higher than regular commodity eggs. When income is lower, it is possible that consumers will choose to spend less on premium products and buy the cheaper version. However, due to the impact of campaigns, documentaries and social media, there has been a trend of choosing to purchase premium products for the sake of health choices.

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Supply chain and manufacturer disruption would have a negative affect on revenues due to the decreased availability of products for sale. All Vital Farms pasture raised shell eggs are processed at Egg Central Station, and if there are negative impacts to the facility, it would harm the business. The company is currently expanding Egg Central to decrease the risks of placing all the literal eggs in one basket.

Valuation

Due to the company’s recent listing, data for an intrinsic valuation may not be accurate enough. Vital also has very few similar companies due to the relatively small industry. However, I chose Cal-Maine Foods Inc (NASDAQ: CALM) and Kerry Group PLC (FRA: KRZ) due to them all being sustainable food companies with similar product emphasis. Although Kerry Group PLC is registered in Europe, I believe this is a fair comparison when it boils down the product line and operations:

Source: Author (Date from Seeking Alpha, SEC Filings, and TD Ameritrade)

As shown, Vital Farms has a very high P/E due to earnings being affected by the pandemic. Leadership and industry experts believe in the recovery from pandemic, and that with time earnings will increase drastically. With the expansion of Egg Central currently underway and the expansion of family networks, expenses are predicted to decrease and thus increase Net Income.Source: Author

In general, Q2 and Q3 have not been kind to the majority of companies (unless you’re FAANG). With Vital Farms surprisingly high Gross Profit Margin, Revenue YoY growth, and low relative market cap, metrics look promising relative similar companies. The future of scaling operations will result in cutting costs, raising EPS, and lowering P/E. With the pandemic, extra expenses of facility cleaning, employee protection, and health efforts are also raising costs-but these will be short-lived and should subside with the receding pandemic.

Conclusion

Although Vital Farms just went public, I believe that after the current frenzy of attention subsides, shareholders will see steady returns in the near future. With tastes shifting to be more health-conscious, consumers will opt for the “better” choice-leaving lots of runway for the company to grow. Vital Farms is a strong buy, and it will be as the industry continues to grow.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VITL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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