Vital Farms
variant views, a Peter Lynch 10bagger, eggs available at Costco, shareholder programs, Celsius?
“Because you trust us to feed your family eggs, you would trust us to feed your family for everything…” (*not financial advice + disclaimer, I own shares)
Read my post-earnings reviews and portfolio update from last week (27%+ returns YTD)
Vital Farms VITL 0.00%↑
Business model: a logistics company connecting 300+ family farms to consumers (ex: Vital Farms buys pasture-raised eggs/butter from family farms, sorts them, then distributes them around US grocery chains for a premium). Provides value to farms with guaranteed long term contracts, higher profits per hen, and “protect(s) the farmer from feed input cost(s).” Consumers want higher quality (and ‘ethical’) eggs and grocery stores are willing to sell them, so Vital Farms provides the product (since 2007). VITL 0.00%↑ went public in 2020 and is currently valued at a ~$630M market cap.
Variant Views: Current valuation does not take into account future margin expansion nor Vital Farms extending their brand into other categories—by the time the right moment is consciously perceptible, it is already too late. As Vital Farms grows, volumes increase, and margins will expand as each truck can transport more pallets per trip. Next, Vital Farms is also an “education” company, teaching farmers and consumers the benefits of sustainable farming/products—thus, it is easier to grow SKUs today as Vital Farms’ has established brand trust with farmers/consumers over 17 years. VITL 0.00%↑ can be worth a few billion $ in a decade. (also, Peter Lynch was at VITL’s conference months ago.)
Notes: egg TAM is around $10-15B, with Vital Farms being the 2nd largest egg brand with only 5-6% of US retail sales volume. Currently self-funded, there’s no debt on the balance sheet and $100M in cash—with a light capital model. Aiming for 35% margins and $1 billion in revenue in 2027 with around $0.10 of CAPEX per $1 of revenue. Management is conservative on new SKUs as “very few companies die of starvation for lack of opportunities but from indigestion”—aims for disruption in future product lines. Remember, it is “Vital Farms” NOT “Vital Eggs”—brand value is massive. Unlike $VITL, brands like OTLY 0.00%↑ could only expand from oat milk to oat milk “ice cream” or “yogurt”. Also, Vital Farms is comparable to Rao’s Tomato Sauce (‘premium’ tomato sauce) which sold for $2.7 billion to Campbell Soup in Aug. 2023.1 (Steve Jobs on brands: “marketing is about values”)
Above is my relatively conservative estimate for FY2023 revenue and EPS. From Q1-Q3 2023, VITL 0.00%↑ generated $18 million in free cash flow and on track to make ~$26 million FCF for FY2023. My Q4E revenue estimate and FY23 EPS estimate of $0.59 is based on Vital Farms’ introduction into Stop & Shop (regional supermarket chain in the Northeast), commentary from the annual Needham Growth Conference on 18 January 2024 (here), and an uptick in Google Search trends after CNBC’s YouTube video. The earnings for FY2023 is in early March so I will post a post-earnings recap then.
My “long term thesis” for Vital Farms hinges on three aspects:
changes in nutrition guidelines
a premium for TRUSTED, quality brands
the eggs are delicious
Anecdotes often precede data. I overheard weeks ago from our pediatrician that said eating two eggs per day is completely fine and recommended. Though this was a guideline for teenagers, this is a massive change from when I grew up—before, one egg a day was “enough.” 2 egg/ day cholesterol study. When I (and many others) were growing up, we were told: eggs raise cholesterol so limit consumption and eating eggs may give you “boils.” These are myths that have shaped our dietary and consumer spending habits; from Harvard Medical School, “research has shown that most of the cholesterol in our body is made by our liver—it doesn't come from cholesterol we eat. The liver is stimulated to make cholesterol primarily by saturated fat and trans fat in our diet, not dietary cholesterol.”2 (And for a movie reference, I Girasoli (The Sunflower) featuring Sophia Loren and Marcello Mastroianni has a scene where they eat a 24-egg frittata on their wedding night—in one siting! Eggs were popular during WW2)
And for a “health trend,” most people do not consume enough protein even though the recommended range is 0.5-0.8g/1lb bodyweight per day (some eat 1g/1lbs body weight, but thats excessive). With people living longer, we need our muscles to remain healthy and strong for longer—and besides, a protein-rich diet is more filling (no Ozempic necessary). Here’s an interesting insight from Jack Weathford on the Mongol’s diet.3
The Chinese noted with surprise and disgust the ability of the Mongol warriors to survive on little food and water for long periods; the entire army could camp without a single puff of smoke since they needed no fires to cook. Compared to the Jurched soldiers, the Mongols were much healthier and stronger. The Mongols consumed a steady diet of meat, milk, yogurt, and other dairy products, and they fought men who lived on gruel made from various grains. The grain diet of the peasant warriors stunted their bones, rotted their teeth, and left them weak and prone to disease. In contrast, the poorest Mongol soldier ate mostly protein, thereby giving him strong teeth and bones.
VITL 0.00%↑ eggs tend to be larger (width/height)—tried to measure densities but was difficult to measure accurately as I didn’t have a beaker. Doing blind taste tests, my friends and I could clearly tell the difference between regular brown eggs and Vital Farm’s eggs, but could not tell the difference between the organic Vital Farm’s eggs and regular (non-organic) Vital farm’s eggs. Egg whites taste the same, but there’s more egg whites in Vital Farm’s eggs; they also have more yolk and are more flavorful + creamier/fuller than regular brown eggs. (The organic designation is based on the chicken feed—if the feed is organic, the eggs are organic, vice versa.)
Now, I often find things labeled “ethical” or whatnot as a marketing gimmick to make consumers feel bad (and pay a premium)—but in the case of eggs, it makes a huge difference in taste (and in VITL 0.00%↑ business operations). Pasture raised eggs mean hens roam around outside and eat whats in nature (bugs, etc.) in addition to supplemental feed. In contrast, regular eggs are a mass produced commodity with hens living next to each other in tight indoor spaces. When hens live outdoors and with space, they live less stressfully, are healthier and make better tasting eggs—the sun kills bacteria/virus, too. And on the business side, the risk of avian influenza reduces dramatically when hens are not living on top of each other—cleaner living conditions = healthier hens, thus longer lifespans per hen. For large scale farms, if there is an outbreak in one area, all hens are slaughtered immediately. For Vital Farms, they have a network of 300+ family farms—decentralization reduces the risk of avian flu spreading. (Each farm represents ~0.3% of egg volume4)
On a longer term view, I believe “sustainable/ethically sourced” foods will continue to grow as more people are aware of where their food comes from; it will probably be one of those things where our grandchildren ask “how could U eat products made unsustainably/unethically.” Trust is so low regarding American food quality so any brand (like Vital Farms) that can ‘walk their talk’ can continue to charge premiums. Another important question is: “will consumers be more or less health conscious tomorrow than today?”
In 2020, Vital Farms said “we're not a commodity egg producer, whereas the impact of their [other producers] gross margin when feed prices move like they have is much more impactful to their overall gross margin.”5 (special thanks to EdmundSEC for the transcripts) Marketed as a “premium” brand, VITL 0.00%↑ does not have to compete on price like other egg producers—this power of branding is HUGE (we overlook etymology; “branding” is a stamp, a.k.a burning in a mark). The recipe for success is combining some brand with great quality products—look at AAPL 0.00%↑ (‘premium’ tech), LULU 0.00%↑ (‘premium’ sportswear), and countless more. The next trend lies in food—and VITL 0.00%↑ is a strong contender for continued success. (In the drinks category, look at Celsius CELH 0.00%↑; it has a type of ‘inimitable’ brand—it’s as if its ‘cooler’ to drink Celsius than RedBull or Monster energy drinks. For ex. I’ve seen many women and men drink Celsius but have never seen a woman drink a Monster MNST 0.00%↑, thus ~1/2 TAM). (Steve Jobs on brands: “marketing is about values”)
The popularity of Whole Foods, Eataly, Erewhon, Farmers markets, and other grocers lie in a new “healthier (and pricier) speciality segment”—which is nothing new… remember Dean & DeLuca? It appears dumb, why would someone pay more for an egg or other foods? But there’s a reason why these businesses are expanding—some customers are willing to pay more for ‘higher quality’ food. Go to a farmer’s market—people are often paying multiples for vegetables, fruits, and protein (compared to Costco/supermarkets) ← this doesn’t show up on “alt-data” sources as people pay with cash/Venmo. And sometimes, it makes sense—fruits from a local farmers market v.s. Costco are incomparable. There’s definitely nuance missed as food ‘quality’ is a tough metric to measure (and very socially sensitive, food preference reveals too much—there’s an old saying: it takes three generations to change one’s [clothing] style, but five for the tongue [food taste] )
“What came first, the chicken or the egg?”
“Thats a trade secret”
There’s more I could write about, but I’ll keep those thoughts for the post-earnings review in March. The initial curiosity about Vital Farms came about months ago after reading a post on Value Investors Club (here) and watching CNBC’s video (here). I kept track of the company here and there, and doubled down after seeing the local Stop & Shop (grocery store) introduce Vital Farms’ eggs. Week after week, the eggs kept selling out, so I continued to “research” VITL 0.00%↑ (and eat tons of their eggs, too). And for “retail investors” like myself, Vital Farms’ shareholder program is not bad. By owning 10 shares (~$150 worth), you receive a dozen eggs and butter every quarter—via StockPerks.
Thank you for reading this far, and feel free to comment your thoughts or share this post. Other write-ups below:
https://robbreport.com/lifestyle/news/raos-tomato-sauce-campbell-soup-1234883267/
https://www.health.harvard.edu/heart-health/are-eggs-risky-for-heart-health
Jack Weatherford, Genghis Khan and the Making of the Modern World
Vital Farms, Inc. 26th Annual Needham Growth Conference https://wsw.com/webcast/needham134/vitl/2278518
Enjoyed this read! Exciting to see their growth in today's health-conscious market. #bullishvitalfarms 🥚🌱