Egg Sourcing Capacity Will Increase Over 40% With New Family Farms

Key Takeaways

• Expansion in egg sourcing and production capacity aims to boost revenue and improve efficiencies, positively impacting margins.
  
• Strong brand initiatives are expected to enhance consumer demand, supporting revenue growth and market expansion.
  
• Vital Farms faces multiple challenges, including avian influenza risks, rising competition, increased commodity costs, and capital expenditure needs, potentially impacting growth and margins.

Catalysts

A food company, packages, markets, and distributes shell eggs, butter, and other products in the United States.

• Vital Farms plans to increase its egg sourcing capacity by more than 40% with the addition of over 125 new family farms, which should positively impact revenue as more eggs become available for sale.
  
• A new egg washing and packing facility, expected to open before 2027, is set to significantly increase production capacity, which can enhance revenue growth and efficiency, potentially improving net margins.
  
• The company expects to launch company-owned accelerator farms that will serve as R&D labs for best practices, potentially improving operational efficiencies and lowering costs, thereby positively impacting net margins.
  
• Investments in a new egg grading line at their Springfield facility, projected to expand capacity by 30% in 2025, are likely to support revenue growth and improve earnings as production becomes more efficient.
  
• Strong brand and marketing efforts, including a new campaign that has increased brand awareness and household penetration, are expected to support revenue growth by driving consumer demand and expanding market reach.

Vital Farms Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vital Farms's revenue will grow by 20.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 8.9% in 3 years time.
• Analysts expect earnings to reach $93.9 million (and earnings per share of $2.07) by about March 2028, up from $53.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.8x on those 2028 earnings, up from 26.6x today. This future PE is greater than the current PE for the US Food industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 4.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Vital Farms Future Earnings Per Share Growth

Risks

• The ongoing outbreak of avian influenza continues to pose a significant risk to Vital Farms' egg supply, which could impact their ability to maintain revenue growth and meet demand. Supply constraints may lead to a modest step down in growth for the first half of 2025, particularly affecting first quarter results.
  
• Vital Farms faces increased competition in the premium egg segment, which could impact both revenue growth and net margins if consumers switch brands or if competitors offer more competitive pricing.
  
• Rising commodity costs, particularly for corn, which have increased by approximately 18% since Q4 2024, may impact production costs, potentially putting pressure on gross margins.
  
• The need for significant capital expenditures to enhance production capacity and make supply chain improvements could impact free cash flow and increase financial risk if not managed properly, especially given the higher planned CapEx for 2025 and beyond.
  
• External factors such as weather-related disruptions, as experienced with snow in Missouri affecting operations, can lead to inefficiencies and potentially affect production costs and revenue reliability.

Valuation

• The analysts have a consensus price target of $47.333 for Vital Farms based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $52.0, and the most bearish reporting a price target of just $42.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $93.9 million, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $32.04, the analyst price target of $47.33 is 32.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.