Vital Farms stock (NYSE:VITL) has rallied by a tremendous 302% over the past year, raising the question of whether this remarkable performance can continue. The eggs and dairy farming company benefits from consumers increasingly prioritizing quality nutrition, ethical sourcing, and sustainable food choices. This shift has driven significant top and bottom-line growth in recent quarters. However, concerns about the stock’s valuation persist. As a result, I am now turning neutral on VITL stock.
Consumer Shift to Ethical and Quality Nutrition Fuels Growth
Vital Farms’ impressive performance in recent quarters can mainly be attributed to the growing consumer demand for quality nutrition and ethically sourced products. As consumers become more conscious of the origins and quality of their food, they increasingly seek options that align with their standards and values.
We have all read stories and watched documentaries regarding the dangers of ultra-processed food prevalent in the United States. It’s no surprise, then, that an increasing number of consumers are choosing organic alternatives as they become more informed.
Vital Farms is very well-positioned to capitalize on this trend by offering pasture-raised eggs from small, family-owned farms, addressing the demand for both quality and ethical sourcing. This sharply contrasts conventional egg farming, where hens are often confined to cages or crowded indoor facilities. Instead, Vital Farms promises that their farmers prioritize the welfare of their hens and are transparent in their farming practices, which explains why the company resonates strongly with health-conscious consumers.
Following its success in fresh eggs, Vital Farms utilized its brand momentum. The company expanded its product range, now selling hard-boiled eggs and liquid whole eggs, and its distribution network, which now includes over 24,000 retailers nationwide. With these initiatives being met with strong underlying demand, Vital Farms’ revenue growth has been truly explosive. Its three-year revenue CAGR (from Q1 2021 to Q1 2024) stands at a tremendous 30.5%, showing no signs of a slowdown.
Assessing Vital Farms’ Profitability & Valuation
Vital Farms’ explosive revenue growth in recent years, combined with its strong pricing power, has led to rapidly improving profitability. Let’s take the company’s most recent Q1-2024 results as an example. For the period, revenues came in at $147.9 million, up 24.1% year-over-year. Higher production and lower commodity and diesel costs also contributed to its gross margin expanding by 400 basis points to 39.8%. Add lower shipping costs to the mix, and the adjusted EBITDA margin jumps from 11.6% to 19.7%.
With strong momentum set to last throughout the rest of the year, Wall Street projects that Vital Farms’ earnings per share (EPS) will land at $0.95, up 60.4%. However, the pivotal question remains: does such substantial EPS growth suffice to rationalize the stock’s remarkable 302% surge over the past year? Even with such robust EPS expansion, Vital Farms is trading at a forward P/E ratio of 48.2x based on Wall Street’s FY2024 forecast.
This is an exceptionally high multiple for an egg company. Stocks of farm products usually trade at single-digit P/E ratios due to the market’s competitive nature, ease of entry, lack of pricing power, and other factors inherent to commodity-based businesses. However, Vital Farms’ premiumization strategy and brand power have enabled it to command higher prices and distinguish itself from other brands.
In the meantime, the company’s growth prospects remain strong as it continues to expand its footprint. With plans announced for a second egg washing and packing facility in Seymour, Indiana, management aims to further solidify its position in the pasture-raised egg market. This 72-acre Egg Central Station comes after the success of the Missouri facility and promises to generate over $350 million in additional revenue by 2027.
To put this into perspective, it represents approximately 74% of last year’s total revenues, implying a huge revenue surge anticipated in the upcoming years. Still, whether this justifies paying 48.2x this year’s expected earnings is tough to say. For me, after being bullish for a while, I believe that turning to a more neutral stance makes sense after last year’s extended rally.
Is Vital Farms Stock a Buy, According to Analysts?
Following Vital Farms’ enormous rally, Wall Street analysts have grown increasingly skeptical. The stock features a Moderate Buy consensus rating based on four Buys and four Holds assigned in the past three months. However, at $42.83, the average Vital Farms stock forecast implies 6.51% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell VITL stock, the most profitable analyst covering the stock (on a one-year timeframe) is Ben Klieve of Lake Street, with an average return of 163.62% per rating and a 100% success rate. Click on the image below to learn more.
The Takeaway
Overall, while Vital Farms has successfully capitalized on the growing consumer preference for ethical and quality nutrition, as evident in its impressive revenue growth, valuation concerns remain. Despite strong earnings projections and a continuously expanding footprint, the stock’s meteoric rise makes it hard to say whether it still makes for a good buying opportunity. For this reason, my stance on VITL stock has shifted to neutral.
