In the fall of 2021, I called shares of Vita Coco (NASDAQ:COCO) a refreshing investment in a premium article. This came after the company had seen a difficult public offering which surprised me given the growth reported by the business, the category at large, and the fact that profitability was already achieved.
Shares struggled after the public offering and into 2022, but shares came to life this year after very strong operating momentum, with the business posting strong margin expansion. This is to be applauded, as the long-term secular growth play looks interesting, although it trades at a premium valuation here.
A Force For Good
The paragraph header was the mission of Vita Coco when it went public, being a brand that is a force for good, offering healthy (or at least healthier) beverages based on natural resources such as coconuts, to provide versatile nutrition and natural energy.
Considered a niche, such a line-up of drinks could be used at breakfast, during a workout, put into a cocktail, or simply used for everyday energy and hydration purposes. By obtaining the inputs in a social manner, the idea is to create thriving local communities in developing nations, while providing healthier alternatives for consumers.
The potential for such a solution came along as the drink was readily available in Brazil, prompting US visitors to bring the product home, after which beverage giants like Coca-Cola and PepsiCo moved into the category as well by the end of the 2000s. The so-called natural segment made up over 10% of a more than $100 billion US beverage industry, although that growth of the category is superior to the overall industry. Around the time of the offering, Vita Coco had thousands of farmers as suppliers, supplying some 2 million coconuts in a single day!
These inputs make that prices are relatively high compared to other beverages. Despite this premium, the category at large shows decent growth, as the company commanded a 50% market share in the US coconut water industry when it went public. The offering was a bit of a failure as shares were sold at $15 per share, far below the lower end of the preliminary offering range at $18 per share.
The company was valued at $800 million at those levels, a valuation applied to a business that generated $310 million in sales in 2020, accompanied by fat operating profits of $47 million, and operating earnings came in around $30 million if we adjust for a one-time benefit.
Revenues rose some 15% in the first half of 2021 to $177 million, putting the company on track for sales of $350 million. The issue is that operating profits were trending at just $24 million per annum, resulting in an earnings power of about $0.35 per share. Moreover, preliminary third quarter sales were up 30% to $114 million, with operating profits seen higher as well, boding well ahead of the offering.
With shares down to $14 per share on the first day of trading, I was quite upbeat, but recognizing the inherent risks of such an investment, I only took a small position.
Coming Down – Coming To Life
Shares of Vita Coco fell to lows of around $8 per share in the spring of 2022. Shares started 2023 around the $13 mark, only to rise to a high of $33 per share over the summer, with shares now trading around $27.
In March, Vita Coco reported 13% sales growth for 2022 with revenues reported at $428 million, as gross profits actually fell some ten million to $103 million. This deleveraging meant that GAAP operating profits fell from $25 million in 2021 to $3 million in 2022. Fourth quarter revenues were up just 6% to $92 million, with operating losses of $5 million being flat compared to the year before, in what typically is a softer quarter, with higher input prices hurting the margins for the year.
2023 sales were expected to rise by 9-11%, but more important is that adjusted EBITDA was seen between $52 and $58 million which looks very favorable, in fact spectacular, compared to a $20 million adjusted EBITDA number reported in 2022.
In May, Vita Coco posted a 14% increase in first quarter sales to $110 million with operating profits coming in at nearly $7 million, compared to substantial losses this period in 2022. The company hiked the sales guidance in a minimal fashion, with sales seen up 9-12%, as EBITDA was now seen between $54 and $59 million. With EBITDA reported at $9 million during the first quarter, the outlook for the rest of the year is even more promising.
Later that month, selling shareholders offered shares at $23, taking advantage of the share price momentum. During the summer, second quarter sales were reported early in August. Revenues were up 21% to $140 million, with operating profits reported at $20 million. Net earnings of $18 million came in at $0.31 per share based on a near 59 million share count.
These earnings made that net cash grow to $48 million as the company now sees full-year EBITDA between $56 and $60 million after that metric came in at $33 million so far this year. With realistic earnings trending at $40 million per annum, the company could earn close to $0.70 per share with net cash holdings equal to just below a dollar per share.
And Now?
The 59 million shares of Vita Coco grant the business a near $1.6 billion equity valuation and a slightly lower enterprise valuation. This makes that valuations have risen substantially again with earnings power seen at around $0.70 per share, granting the business a mid-thirty times earnings multiple.
While this is still a high multiple, the underlying results show a healthy composition of growth. Of the 21% growth rate reported in the second quarter, volumes were up 17%, when many peers were posting volume declines as the resulting price hikes were less than inflation, meaning that the gap with other drink categories is narrowing. Moreover, Vita Coco’s market share has surpassed the 50% mark, coming in at nearly 52%, demonstrating the strength of the brand.
While I still hold a tiny position in Vita Coco which I initiated soon after the IPO, and I believe in the long-term growth of the business and category, I am mindful that the company has not delivered entirely on expectations while earnings multiples are high.
Amidst this, I am susceptible to sell on potential rips to levels in the $30s, with other parts of the market being more attractively priced. On the other hand, I am keen to keep a small allocation given the potential for a long-term multi-bagger or M&A potential.
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