Vital Farms, Inc.

VITL Details

Vital Farms, Inc. (NASDAQ: VITL) is a food company that produces pasture-raised products. The company currently produces six pasture-raised products including shell eggs, butter, hard-boiled eggs, ghee, liquid whole eggs and egg bites.  It is the second-largest U.S. egg brand by retail dollar sales.

Result Performance – For the first quarter ended 28 March 2021 – (Q1FY21)

• Rise in Revenue: Net revenue for the quarter was reported at $58.5 million, up 23% YOY driven mainly by the rise in volume to distributors and new distribution at new and existing customers.
• Improved Gross Margin: Gross margin for the quarter increased 311 bps to 36.4% due to better offsize egg utilization, reduced material costs for butter, and volume leverage over direct labor and overhead costs.
• Rise in Adjusted EBITDA: Adjusted EBITDA for the quarter stood at $4.7 million, up 25% YOY, mainly driven by the rise in egg and butter volume, expanded gross margin, and leverage over fixed operating costs.
• Net Income Jumped by 80%: Net income stood at $3.5 million, up 80% YOY driven by volume growth and cost benefits.

Key Data (Source: Company Reports) 

Risks:

Failure to launch new products to engage the customer better than previous engagements could adversely affect the growth momentum of the company. It has recently expanded few product offerings beyond pasture-raised eggs that places the company at a difficult spot to forecast future results of operations. Further, the company is exposed to the risk of fluctuations in commodity prices and the availability of feed grains when needed.

Outlook:

The good start of new financial year reflects on the company’s ability to retain consumers. It witnessed solid growth in both retail distribution and household penetration during the quarter, and momentum is continuing. The company is building an enduring brand, delivering on its growth strategy, and producing ethical food at scale. The management of the company has expressed confidence about the opportunities ahead to reach more households with its high-quality pasture-raised products.

The company, in the meanwhile, has maintained its guidance  of net revenue  in the range of $246 - $253 million in FY2021, representing  a rise of 15 - 18% over FY 2020. However,  it has upwardly revised its guidance on adjusted EBITDA to come in the ambit of $7 - $9 million from earlier guidance of  $6 - $8 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: The purple color line in the chart shows RSI (14-period).

The stock has broadly been on a downtrend and in the process, it has made a new low of $18.72 and closed at $18.77 in the ongoing week, reflecting weakness in the trend. The technical indicator RSI with a reading around 34 and a curve at the end pointing down, suggests weak momentum for the stock while the same is approaching the oversold zone.

Going forward, the stock may have resistance around $22.15 whereas support could be around $17.00.

Stock Recommendation:

The stock has made a 52-week low and high of $18.9 and $43.2999, respectively and is currently trading below the average of 52-week high-low range.

Considering the aforesaid facts, we have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We believe the company can trade at a slight premium to its EV/Sales Multiple (NTM) (Peer Average) as the company is rooted in conscious capitalism and the business model allows to deliver quality products at scale.

However, the investors should closely track related risks such as the changing consumption pattern of consumers, intense competition, the launch of the new product to keep customers engaged, and government regulations.

Considering the aforesaid facts, we give a “Speculative Buy” recommendation on the stock at the current market price of $18.77 per share, down 2.09% on 13^th July 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.