Description

Company Overview

This is a small cap company, perhaps a PA idea for most. VITL sources eggs from family farms (over 300 such farms today), processes them at their centralized facility, and sells them at more than 21,000 retail locations across the country. The company positions itself as more ethical alternative to factory farms. To be certain, this is a niche product – the eggs can cost >$8 per dozen – but one that I believe can grow much larger than the current $400 mm market cap suggest. The company operates with a single large processing facility dubbed “Egg Central Station” (owned) along with a single nearby warehouse (leased). The company already enjoys strong distribution at chains like Whole Foods and Sprouts but has <5% penetration across the broad mass-market grocery category.

Thesis

Applying a long-term horizon and looking at the current economic and social environment, I believe VITL has several attractive investment attributes: (a) positioning within an affluent customer base shown to be more resistant to inflation and recession (b) positioned correctly for social and macro trends (c) pricing power and potential for margin expansion upon eventual reversion of inflated input costs.

The purchaser of $8 eggs is less concerned with inflationary price increases, even at the higher levels of food inflation we’ve recently seen (of course there will be some limit where even the company’s core customers might balk at the prices many already consider outrageous, but again I generally prefer investing in luxury and lifestyle products in this environment). Eggs are also a good source of protein and calories and are actually still priced cheaply relative to other sources of protein and calories such as red meat or a bag of potato chips.

I believe more consumers will shift to non-factory farmed eggs over time. Many consumers already purchase eggs from neighborhood sources. VITL’s family farms offer open air and >100 square feet per hen. Brand awareness is high, and the company’s high-end positioning and brand ethos actually acts as effective low-cost marketing. This is an attractive company from an ESG perspective. The taste difference of pasture raised eggs vs. regular eggs is also easily observable. Within this category, VITL’s data shows pasture-raised egg penetration growing from 2% to 4% over the past few years. As an investor, it’s important to share the view this figure has sufficient room to grow from here. Survey results support both point (a) and point (b).

VITL is currently facing high levels of inflation in inputs across corn, soybean, etc. which have recently risen to multiyear highs. The company has already increased prices mid-single digits this year and is implementing a mid-teens price increase in this month with the goal of price offsetting cost inputs. However, beyond 2022, I expect the retail price increases to be stickier and persist longer than the commodity input inflation, which will mean-revert. This dynamic will benefit many other companies as well but relies on one’s opinion of pricing power and commodity prices over time.

Valuation

With share price declines, valuation has been reduced to <1x sales while the company already features a 30%+ gross margin despite recent declines from the aforementioned cost pressure. Revenue is forecasted to grow >30% and >20% in 2022 and 2023 to more than $415 mm. The current facility recently completed an expansion and is capable of supporting $650 mm of revenue. Management has plans for an additional facility to enable further growth beyond that level. My own assumptions suggest that the company’s ambition for low double-digit ebitda margins in the long-term is understated and easily achievable. In the context of this revenue and margin potential, the current EV of ~$315 mm is an attractive entry point for me. The company’s status as a certified B Corp. and its overall “conscious capitalism” brand positioning with both consumers and farmers could reduce the likelihood of an acquisition of the entire company but I believe this is also a possibility longer-term.

Catalyst

input price relief, new distribution wins