Vita Coco: Journey To An Impressive Growth Trajectory

Funding thesis

Our present funding thesis is:

• COCO has completed a unbelievable job of cornering the coconut water phase, gaining vital market share by means of profitable advertising and marketing and a eager give attention to the well being side. The model is now synonymous with the phase, positioning the enterprise nicely to broaden its product vary.
• We imagine demand for coconut drinks will stay robust, owing to the well being advantages, number of use circumstances, and good demand throughout demographics.
• There’s an expectation that continued innovation is carried out to keep up its >10% development fee however we’re comforted by its FCF yield of 5%. Even when development slows, margin/FCF enchancment might be ample.

Firm description

Vita Coco (NASDAQ:COCO) is a number one model within the beverage trade, specializing in coconut water merchandise. Based in 2004, the corporate has quickly grown to develop into a distinguished participant within the well being and wellness sector. Headquartered in New York, Vita Coco has a world presence and distributes its merchandise throughout numerous markets.

Share value

COCO’s share value has obtained off to an incredible begin, returning over 80% throughout a interval of issue for the markets. Traders are extremely bullish on the monetary growth to this point and the overarching outlook for the enterprise.

Monetary evaluation

Offered above is COCO’s monetary outcomes.

Income

COCO’s income development has been robust since FY19, with a CAGR of 15% into LTM Jun23. Though this can be a small pattern, the broader trajectory of the enterprise has been extremely constructive, significantly within the final 5-10 years.

Enterprise Mannequin and business growth

COCO primarily produces and markets pure coconut water merchandise. The model emphasizes its dedication to offering customers with a wholesome, hydrating, and pure beverage possibility, free from synthetic components.

Coconut water is understood for its pure hydration properties and electrolyte content material, making it a preferred selection amongst health-conscious customers. It has grown in reputation persistently for an prolonged interval, as the next graph illustrates.

The rising Western emphasis on health-conscious existence has pushed demand for pure and useful drinks like coconut water (“Higher for you” drinks). We don’t see this as a short-term development, as it’s primarily based on an improved understanding of the hostile well being implications of sure meals. Additional, in lots of circumstances, customers aren’t forgoing a major quantity of style.

COCO gives a spread of flavors and packaging choices, catering to totally different tastes and preferences. The important thing, nonetheless, is the broad use case of coconut water. This selection permits the model to enchantment to a broader client base, making its give attention to coconut commercially viable on a world/giant scale.

Moreover, development within the phase is disproportionately strong relative to different beverage segments (and fewer depending on pricing). It has carried out higher than Vitality and Sports activities, two segments which have carried out exceptionally nicely in recent times. Compounding that is that COCO’s development exceeds the phase, implying continued market share development regardless of its current main place.

Lastly, development for COCO is powerful amongst all ethnicities and ages, including additional proof to its common nature and real growth right into a mainstream beverage possibility in society. This underpins the continued energy of the coconut water development trajectory.

It’s simple to counsel this can be a development or fad however we don’t imagine this to be the case. The product is wholesome and tastes good, it has a broad use case, and all demographics have an interest within the product. Will it’s as standard as Water, Espresso, or Soda, most likely not, however will it carve out a major phase of its personal, we imagine so.

COCO’s advertising and marketing efforts give attention to the well being and wellness side, increasing its technique past this by that includes endorsements from celebrities and influencers. The coconut water phase skilled a big inflow of entrants as curiosity on this elevated, with COCO’s technique propelling the corporate forward of its friends. The model’s distinct packaging and visible identification at the moment are synonymous with coconut water, with many replicating its distinct blue and inexperienced tone.

COCO has developed a powerful worldwide presence by means of model growth, supported by a geographically diversified provide chain, making certain it could effectively supply a sustainable amount of coconuts.

The corporate accesses customers by means of its partnership with main retailers and distributors globally, making certain it has the broadest publicity to people, which is important advertising and marketing in itself.

Naturally, the following steps for the enterprise will contain product growth. Administration estimates that the “higher for you” hydration class is value upwards of $30bn. Throughout the Sports activities Drinks, Flavored Water, and Juice sub-segments, the Vita Coco model is positioned completely for fulfillment.

The corporate will profit from the continuing development in direction of more healthy drinks/pure substances to place itself as a more healthy various, underpinned by the good style of coconut. The important thing might be whether or not Administration can discover an angle for differing flavors whereas sustaining the foundations of healthiness (Lots of its friends combine coconut water with flavors similar to Chocolate).

Most lately, COCO launched an alcoholic canned beverage in partnership with Diageo (DEO), Coconut milk, and in addition “PWR LIFT”, a Sports activities Drink various that’s excessive in protein with no sugar.

As the next bridge illustrates, product growth is contributing materially to top-line development.

Along side product growth, continued enlargement globally will assist natural development. We’re comfy that the model buildout in recent times will assist profitable entry.

Vita Coco operates in a extremely aggressive panorama that features each established and rising manufacturers within the beverage sector. Key direct opponents embody ZICO, Coca-Cola’s Harmless (KO), and Amy & Brian.

Margins

COCO’s margins are barely underwhelming presently, though are on an upward trajectory. In the newest quarter, the corporate achieved an EBITDA-M of 15.1%, owing to income development, inflationary pressures subsiding, and working price leverage.

We suspect that as enter prices decline additional and elevated scale is achieved, COCO will be capable to preserve this 15% stage at a minimal.

Q2 outcomes

Offered above is COCO’s most up-to-date quarterly outcomes.

The corporate continues to put up spectacular income development, with +21% within the Americas and +24% Internationally. As mentioned beforehand, a lot of that is pushed by product innovation, which ought to proceed to drive development within the coming years with elevated funding.

Supporting this, nonetheless, is the underlying energy of coconut water. Market share continues to develop nicely, with tendencies broadly unimpacted by financial circumstances.

Outlook

Offered above is Wall Avenue’s consensus view on the approaching 5 years.

Analysts are forecasting a slowdown in development, which is probably going a conservative view given the expansion contribution from innovation. We suspect the enterprise will land at a fee larger than this, though will imply Administration considers M&A as a part of its broader innovation technique. Additional, margins are anticipated to enhance, according to our expectations and Q2.

Trade evaluation

Offered above is a comparability of COCO’s development and profitability to the common of its trade, as outlined by In search of Alpha (11 firms).

The corporate’s development is of course its robust go well with, exceeding the trade throughout a variety of metrics. Contrasting that is margins, that are missing in comparison with the trade and realistically will proceed to take action.

With friends similar to Coca-Cola and Pepsi (PEP), it’s unlikely COCO will obtain ample scale to exceed their stage. This stated, an EBITDA-M of c.15% remains to be extremely engaging.

Valuation

COCO is presently buying and selling at 33x LTM EBITDA and 22x NTM EBITDA. Given the quick buying and selling historical past of the enterprise, its historic averages aren’t very helpful.

In search of Alpha is extremely bullish on the inventory, score its valuation a “C” and the inventory as an entire a “Sturdy Purchase”. This is because of its LTM PEG of 0.4, implying traders aren’t pricing within the spectacular development of the enterprise. When layering in margin and FCF enchancment, the inventory appears primed for additional share value beneficial properties within the coming 12 months. Underpinning this in our view is its FCF yield of 5%, a gorgeous stage that may develop disproportionately to friends.

We imagine the draw back is considerably protected by the very fact one of many Beverage majors could be extremely all in favour of buying the enterprise ought to there be a considerable decline.

Last ideas

COCO’s growth in the previous few years has been extremely spectacular, significantly as a result of it was not taken over by a big peer however as an alternative selected to go-it alone. Administration has constructed a very world model, which is constructed on the notion of high quality and healthiness.

We imagine development ought to proceed within the coming years, primarily because of the energy proven by the broader coconut phase. Natural development is powerful whereas there may be ample scope for brand spanking new merchandise to keep up its trajectory.

At a FCF yield of 5% and a <0.8 PEG, we take into account COCO a purchase.