Some Vital Farms, Inc. (NASDAQ:VITL) Shareholders Look For Exit As Shares Take 25% Pounding

Vital Farms, Inc. (NASDAQ:VITL) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 87% in the last year.

Although its price has dipped substantially, Vital Farms may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 28.3x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for Vital Farms as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Vital Farms

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What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Vital Farms' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 136%. The strong recent performance means it was also able to grow EPS by 701% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 0.2% as estimated by the eight analysts watching the company. That's shaping up to be materially lower than the 14% growth forecast for the broader market.

With this information, we find it concerning that Vital Farms is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

A significant share price dive has done very little to deflate Vital Farms' very lofty P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Vital Farms currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Vital Farms with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Vital Farms. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.