Vita Coco (COCO) is coming public this week (prices Wednesday to trade Thursday). The current range is $18-21 for a deal size of about $225M and a market cap of $1.1B. I like this one and think it’s going to be a winner.

Investment Summary

Here are the key points:

  1. The company started early (2004) and has grown and learned how to execute in the business. They have crushed their competitors in the segment including giants like Coca-Cola (COKE). Rumors circulated a few years ago that PepsiCo (PEP) was interested in buying Vita Coco to compete with the now-discontinued Coke product Ziko.
  2. Growth and margins have been resilient – LTM sales were $334M with $23M of net income.
  3. People love the stuff and retailers rate it as one of the best brands they deal with (at least in NYC where they are based.)
  4. While they already dominate several channels in their core category (coconut water) they have opportunity to expand their presence in the convenience store segment and fast-casual dining.
  5. New versions of their core product broaden the brand appeal to more consumers and will continue to drive growth in existing channels.
  6. New products are being fielded and tested that will add to long-term growth. They may not all end up being winners but some of them will lead to growth in other categories.
  7. I’ve grown to despise this whole ESG business but I suspect these guys will get a good score. (They are a B Corp too.)
  8. Finally at a very high level they have built a strong consumer brand with very little capital and the proposed valuation is an attractive entry point (see below for more on the numbers.)

Some real risks I see:

  1. The company did experience some challenges in their business during 2021 consistent with the transportation issues others have faced. This could be an area that makes some investors cautious in the short-term.
  2. So far some of these “trend food” companies have been a mixed bag for investors. Beyond Meat (BYND) has been a home run – Laird Superfood (LSF) not so much.
  3. Some investors don’t like to see insiders selling stock but in this case it doesn’t look bad to me. They will still own the vast majority of their shares post-IPO so interests remain much aligned. (If you’ve been to NYC you know that some cash out is necessary to live there.)

Valuation

Their long-term model is not a stretch from current operating performance and calls for “mid-teens” revenue growth and “mid to high teens” EBITDA.

Using a $20 share price and the 55.5M shares outstanding post-IPO that gives the company a $1.1B market cap.

I’ll probably get to build a PFV model for this company but using round and normalized numbers for next year they would do around $415M in revenue and $62M in EBITDA putting the multiples at 2.6x sales and 17.7x EBITDA.

I think those figures are fairly attractive and owning a vibrant consumer brand for $1B is also attractive.

Valuations in the group range wildly and where this one ultimately trades may depend more on retail investor demand than institutional.

My conclusion is that the risk/reward is favorable here but we don’t know where it will open up. At the IPO price it is a good bet and depending on post-market trading could be worth taking a meaningful position.

If you put an Oatly (OTLY) P/S number (18x) on it you’d get a $100 share price! (Not being serious here I hope.)

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