Vita Coco Stock: Great Business at a High Price (NASDAQ: COCO)

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While there are many food and beverage companies for investors to choose from, finding niche players in this market that prove to be innovative can be a challenge. A company that fits this bill is a company called The Vita Coco Company (COCO). Recent management performance has resulted in revenue growth at a pleasant pace. This trend is expected to continue for the foreseeable future. Unfortunately, the company is struggling with margin compression which is expected to continue at least in the current fiscal year. But when you factor in the company’s overall low risk and consider its price compared to similar companies, it’s not that bad. More likely than not, the high multiple the company is trading for likely means further upside is limited. But for very long-term investors who don’t mind waiting for a long time, this might just be a decent prospect to consider.

A play about coconut water

Vita Coco’s operating history dates back to 2003. Since then, the company has grown to become an interesting player with a large footprint. It made its mark producing and selling packaged coconut water, and in recent years has expanded into other healthy drink categories. In addition to selling its Vita Coco brand of coconut water, the company also sells other coconut oil and coconut milk offerings. Besides that, he owns a brand called Runa, which is a plant-based energy drink inspired by a plant native to Ecuador. Another brand the company owns is called Ever & Ever, which is a packaged water brand. Additionally, it also has a flavored protein infused water product called PWR LIFT.

In terms of the sales organization, management said that today the business has two key segments. One of them is the Americas segment. In the company’s 2021 fiscal year, this particular segment accounted for 83.2% of the volume sold by the company and 85.3% of the total revenue generated by the company. The other segment is the international segment, which is responsible for the remaining 16.8% of the company’s sales volume and 14.7% of its revenue. Looking at it from another angle, we can see that in 2021, its own coconut water brand Vita Coco was responsible for 70.2% of its overall revenue. Private label sales accounted for an additional 24.9% of sales. And the “Other” category of revenue accounted for the remaining 4.9% of sales.

Vita Coco historical financial data

Author – SEC EDGAR Data

Over the past three years, the company’s sales have grown at a very good pace. Between 2019 and 2021, revenues increased from $283.9 million to $379.5 million. The volume sold has undeniably contributed significantly to the company’s revenue growth. For example, between 2020 and 2021, the company’s sales increased by 22.2%. This increase is largely explained by a 17.9% increase in volume sold. Further, management expects this trend to continue for the foreseeable future. For fiscal 2022, management expects sales to increase between 16% and 20%. That would bring revenue to between $440 million and $455 million.

Although the company’s revenue trajectory has been encouraging, profitability has been somewhat mixed. Net profit fell from $9.4 million in 2019 to $32.7 million in 2020. Then, in 2021, net profit declined to $19 million. Management attributed a significant portion of this decline in profitability to an increase in cost of goods sold per case equivalent which, in turn, was driven by deteriorating ocean freight rates as well as other inland logistics issues. . The company was also affected by pricing and product mix issues, these, combined with other additional cost of goods sold, impacting the business by $24 million. The bad news is that management expects this type of pressure to continue in fiscal 2022. However, they did not provide any guidance as to what the net earnings for the year might be.

There are, of course, other measures of profitability that we should consider. One of them is operating cash flow. After rising from $21.8 million in 2019 to $33.3 million in 2020, it plunged to $16.2 million last year. That said, if we adjust for changes in working capital, the decrease would have gone from $31.9 million in 2020 to $21 million last year. The only profitability indicator that has consistently increased is EBITDA. This amount increased from $20.1 million in 2019 to $35.1 million in 2020 before climbing slightly to $36.9 million last year. This is the only profitability metric for which management has provided guidance for fiscal year 2022. According to their estimates, it should be between $32 million and $36 million. If we were to apply this same type of year-over-year variation, using the midpoint of expectations, net earnings should be around $17.5 million while cash flow from operations should be $19.3 million.

Vita Coco Trading Multiples

Author – SEC EDGAR Data

Using these numbers, we can effectively assess the company. But the attractiveness of the company will be determined by the year of data we choose to rely on. For example, if we rely on 2021 numbers for the company, it is trading at a price/earnings multiple of 30.7. This rises to 33.3 if we look at 2022 estimates and drops to 17.8 if we rely on what the company did in fiscal 2020. Using the price/cash flow approach of operating, the multiple for the company using 2021 data would be 27.7. This rises to 30.2 if we use 2022 estimates, while falling to 18.3 if we rely on 2020 results. I also looked at the business through the lens of the EV/EBITDA multiple. The 2021 numbers give rise to 15. This increases slightly to 16.3 if we rely on the 2022 estimates. And it totals to around 15.8 if we rely on the results obtained in 2020.

To put the price of the company into perspective, I decided to compare it to five similar companies. On a price/earnings basis, three of the five companies performed positively, with a range of 9.5 to 98.3. Using the price/operating cash flow approach, the range was from 21.1 to 107.9, with four of the five companies included in this range. In both of these cases, only one of the companies reviewed was cheaper than Vita Coco. Finally, using the EV to EBITDA approach, the range was 21.1 to 123.3. In this case, using our 2021 results, our prospect was the cheapest of the bunch.

Company Prizes / Earnings Price / Operating Cash EV / EBITDA
Vita Coco 30.7 27.7 15.0
SunOpta (STKL) 9.5 107.9 22.4
Vital Farms (VITL) 98.3 52.5 69.3
Calavo Producers (CVGW) 98.1 47.4 38.7
Whole Earth Marks (FREE) N / A N / A 21.1
Landec Corporation (LNDC) N / A 21.1 123.3

Carry

For investors interested in a fast-growing niche beverage business, Vita Coco is definitely worth looking into. Ultimately, I suspect the company will do well for a long time. That said, it faces headwinds due to high costs and logistical issues. More likely than not, it will eventually pass. And if so, it could result in a decent upside for the company. But until we see evidence of that happening, while the company’s stock might be cheap compared to other players, it looks pretty expensive on an absolute basis. The company is helped by the fact that it has excess cash over debt of $28.61 million. This greatly reduces the risk for investors and makes paying a higher premium more reasonable. But that’s not enough to make me feel like it’s a strong and compelling prospect right now. I see it more as a neutral opportunity that tends towards a “buy”.

Eleanor C. William