The Vita Coco Company (NASDAQ:COCO) just went public last week via an initial public offering (IPO) at $15 per share. Since then, COCO stock has fallen to $13.71 per share, which Yahoo! Finance indicates gives it a market cap of $760 million.
Yahoo! Finance uses Refinitiv data to ascertain their market cap, so I am confident that this is a reliable number. It also coincides with my estimate that, after including in-the-money stock options, the market cap is about $817.6 million.
This is based on figures on page 32 of the prospectus, which shows there are 55.496 million in shares outstanding after the IPO. It also includes 4.14 million shares in options that have a $10.05 strike price, as seen on page 33. As a result, the total diluted shares will be 59.636 million. At $13.71, the market value is $817.6 million.
As a result, I believe COCO stock will tread water — at least, it will until it becomes clear the stock is not that expensive. This will depend on how well its third-quarter sales and cash flow turn out.
Why Vita Cocco Stock Might Be Expensive
My analysis is that its market value still puts Vita Coco, a coconut water distributor, at a fairly steep price. This is based on figures that the company provided in its recently-completed IPO prospectus.
For example, the company’s IPO prospectus indicates that it produced $32 million in adjusted EBITDA during the trailing 12 months (TTM) ended June 30. This is not explained very well in the prospectus. In fact, the figure does not appear in anything other than some graphs on pages eight and 132 of the document.
As a result, at a market value of $817.6 million, the price-to-adjusted EBITDA is 25.6x. This seems fairly high for a company whose TTM sales of $334 million were only 7.39% over the 2020 full-year sales of $311 million.
Q3 Sales Could Turn Things Around
However, I will say this. Vita Coco indicated on page 27 of the prospectus that it expects sales for the third quarter to be between $112 million and $116 million. This compares to just $87.3 million for last year’s Q3 sales. In other words, at the $114 million mid-point figure, sales could be up 30.55%.
If that does occur, the company’s $818 million market cap (with no debt, after the IPO proceeds are used to pay it down) will not be that expensive.
For example, on page 97 of the prospectus, the company indicated that its six-month EBITDA margin was 9%. It made $15.6 million in adjusted EBITDA (page 107) on sales of $177.2 million, giving it an 8.8% adjusted EBITDA margin.
During 2020, Vita Coco made an EBITDA margin of 11%. If sales do indeed rise more than 30% in Q3, I would expect to see that margin increase. I also suspect the company will be cash-flow positive during 2021, just as it was in 2020.
What COCO Stock Could Be Worth
In 2020, Vita Coco produced about $33 million in free cash flow (page F-7) on sales of $310 million. That is about a 10% margin. Assuming sales grow 30% this year to about $400 million, expect to see FCF at $40.3 million.
That implies that at a 5% FCF yield, COCO stock’s market cap could be $806 million. This is seen by dividing $40.3 million by 5%. That figure is slightly lower than today’s fully-diluted market value of $817.6 million.
However, the market might be willing to give the company a better valuation if Q3 sales growth hits 30%. Also, if ongoing sales of coconut water and related products are expected to rise at this pace, the market could give it a 4% FCF yield.
That results in a market value of about $1 billion, or 23% over today’s price of $13.71. It also implies a price of $16.86 per share.
Therefore, all eyes will be on Vita Coco’s Q3 sales report as well as analyst forecasts of its ongoing sales growth. Based on this, COCO stock could be at full value or slightly undervalued.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
