Ticker: VITL; Analysis Date: 5/3/2024
Wait for the stock to fall below $20.
About: They sell premium high grade pasture raised eggs. Typical eggs in the market sell for under 30c per egg. Vital Farms eggs sell for 62-72c/egg. Almost double the typical eggs in the market.
Mission Alignment
We need to eat healthier food and not genetically modified food full of industrial chemicals. Their hens are also given a lot more space to roam around, leading to lower stress hormones.
Moat
Brand: This is their primary moat.
The egg industry has a lot of labels – humane, pasture raised, cage free, free range, organic, no-antibiotics etc. You have to spend time to understand their meaning and differences. Most people don’t have that much time, hence once they trust a brand, they will stick to it, as long as they can afford it.
Creating humane/organic/pasture raised practices is not difficult. Once you find a brand, you typically stick to it, as the effort needed to research another brand is significant.
Customers’ opinions: I found them from a Youtube video. They were highly recommended. Amazon reviews are 4.8/5 with 14k ratings.
Financials
Growth: Their revenue grew at 30% per year for the last 3 years. Last year they grew at roughly 30%. In that time, SG&A grew by 27.5% and 20% respectively. Their revenues are growing faster than their costs. Hence, their operating margins have improved from 5.7% in 2020 to 7% in 2023. They are profitable with $25M net income and $39M of free cash flow.
Debt and cash: they have $116M cash, more than enough to pay down all of the $22.6M debt.
3 yr forecast
| Growth Rate | Revenue | Gross Margin | Gross Profit | Op ex % Rev | Operating expenses | Operating profit | PE | Value ($M) | |
| Best Case | 22% | 855 | 34% | 291 | 25% | 214 | 77 | 60 | 4,618 |
| Baseline | 18% | 774 | 31% | 240 | 28% | 217 | 23 | 50 | 1,161 |
| Worst Case | 12% | 662 | 29% | 192 | 29% | 192 | 0 | 40 | 0 |
In 3 years, they will be worth $1.1B to $4.6B. Assume around $2.5B. I want the money to double in three years, so they need to be worth $1.2B today. With a margin of safety, I want to buy around $800M, which brings the purchase price to under $20.
Insiders: There is some insider selling, but nothing alarming.
Competition
While there is quite a bit of competition, they have the most boxes checked and are the only ones with farm traceability, allowing them to charge more than competitors while attaining growth.
| Unit price | Organic feed | Free range | Pasture raised | Farm traceability | Certified humane | |
| Happy egg company | 42c | Y | Y | N | N | N |
| Nellie’s free range | 50c | N | Y | N | N | Y |
| Backyard eggs | 50c | Y | Y | N | N | N |
| Vital farms non-organic | 61c | N | Y | Y | Y | Y |
| Vital farms organic | 72c | Y | Y | Y | Y | Y |
| Pete and Gerry’s non-organic | N | Y | Y | N | Y | |
| Pete and Gerry’s organic | 62c | Y | Y | Y | N | Y |
Conclusion
Positives:
- States passing free range laws
- Organic / quality food trend
- Industry declined but VITL revenue increased. Strong brand recognition.
- New product line of butter – prioritizing quality over growth
Negatives
- Capex delayed. Will impact 2024 profitability.
- Other verticals not validated
- Entering food services (farm to table restaurants). Unclear if they will grow in that industry.
- Butter revenue declining. Sourcing farms is difficult.
- Freight rates might be higher than in 2023
- They expect 2024 growth to come mostly from unit growth and not price increases, impacting margin improvement.