Vital Farms (VITL) intends to raise $125 million from the sale of its common stock and that of selling shareholders in an IPO, according to an amended registration statement.

The company sells pasture-raised egg products and butter to consumers in the U.S.

VITL has an enviable growth rate, favorable industry dynamics and resilience to Covid19 pandemic effects.

Austin, Texas-based Vital was founded to sell ethically-farmed, pasture-raised eggs. Pasture-raised eggs are from chickens that have spent at least some time in or have access to a pasture.

Management is led by president and Chief Executive Officer Mr. Russell Diez-Canseco, who has been with the firm since January 2014 and was previously a consultant at McKinsey & Company.The company was founded by Executive Chairman Matthew O-Hayer.

Below is a brief overview video of Vital Foods:

Source: Forbes

Vital sells its eggs through major supermarket chains including:

  • Albertsons Companies (ACI)
  • The Kroger Company (KR)
  • Publix Super Markets (OTC:PUSH)
  • Target (TGT)
  • Walmart (WMT)
  • Whole Foods
  • Others

Vital has received at least $43 million from investors including Jason Jones, Bowie Strategic Investments, Manna Tree Partners, SJF Ventures, Sunrise Strategic Partners and Arborview Capital Partners.

The firm secures eggs from a network of approximately 200 small farms, processes them in its dedicated facilities and sells them via distributors to supermarkets throughout the United States.Vital also produces butter products.

The company said its products were in a total of 13,313 stores nationwide, as the chart shows below:

vitalstores

Selling, G&A expenses as a percentage of total revenue have been variable as revenues have trended upward.

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, rose to 1.5x in the most recent reporting period.

According to a 2020 market research report by United Egg Producers, the U.S. market for eggs continues to grow at a significant rate.

U.S. per capita egg consumption reached an all-time high in 2019, as the chart shows below:

vitaleggconsumption

Most of egg production is sold at retail, followed by eggs that were further processed into products for foodservice, manufacturing, retail and export, shown in the chart below:

vitaleggutil

Major competitive or other industry participants include:

  • Cal-Maine
  • Ornua (Kerrygold)
  • Local and regional egg companies

Vital’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increasing gross profit and variable gross margin
  • Fluctuating operating profit
  • Uneven cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

vitalpl

Source: Company registration statement

As of March 29, 2020, Vital had $1.7 million in cash and $33.2 million in total liabilities.

Free cash flow during the twelve months ended March 29, 2020, was negative ($15.9 million).

VITL intends to sell 5.04 million shares and selling shareholders will sell 2.77 million shares of common stock at a proposed midpoint price of $16.00 per share for gross proceeds of approximately $125 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $658.4 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 19.94%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:

[...] we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We currently expect that these capital expenditures will include approximately $15.0 million of net proceeds from this offering to further fund the expansion of Egg Central Station, additional funding for which may also come from cash on hand or borrowings under our credit facility with PNC Bank, National Association, or the Credit Facility.

Management’s presentation of the company roadshow is available here.

Listed underwriters of the IPO are Goldman Sachs, Morgan Stanley, Credit Suisse, Jefferies, BMO Capital Markets and Stifel.

Commentary

Vital wants to go public to obtain further expansion capital as well as cash out some investor shareholdings.

The company’s financials show strong revenue growth despite the Covid19 pandemic, likely a result of more cooking at home by consumers and thus demand for its egg products.

Selling, G&A expenses as a percentage of total revenue have fluctuated but the firm’s Selling, G&A efficiency rate has increased in the most recent period.

The market opportunity for providing ethically raised egg and related products in North America is large and has been growing as consumers purchase greater quantities of these protein sources.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 82.2% since their IPO. This is a top-tier performance for all major underwriters during the period.

As to valuation, management is asking IPO investors to pay an Enterprise Value / Revenue multiple of 4.24x.

While this is a premium compared to a basket of publicly held food processing firms as compiled by the NYU Stern School which indicated a 2.3x multiple in January of 2020, the firm’s revenue growth trajectory is quite strong and in my view justifies this higher valuation.

Given the firm’s growth rate, favorable industry dynamics and its resilience to Covid19 pandemic effects, my opinion on the IPO is a BUY at up to $16.00 per share.

Expected IPO Pricing Date: July 30, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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