Consumers are increasingly interested in ethical food products, and investors are taking notice. Just look at eggs.
Big names in the egg industry – Vital Farms and Cal-Maine Foods – outperformed the S&P 500 this year, but Vital Farms is the standout. Avian flu outbreaks, supply chain disruptions and inflation hit the egg industry hard. But rather than pulling back from high prices, Vital Egg customers are all in, a sure sign of the market’s appetite for premium, ethical food products.
Austin-based Vital Farms began the year at $15.69 per share, and ended it at $34.82 on September 29. That’s a year-to-date growth of more than 122%. At times, Vital Farms’ gains outpaced Nvidia. By contrast, shares of Cal-Maine Foods, a titan in the industry, are up 29% this year.
“Despite price gaps between VITL and both premium and commodity egg producers widening, it continues to gain dollar and volume share, which speaks volumes about the strength of the brand, in our view,” Matt McGinley, an analyst at Needham & Company, wrote in a May note.
McGinely recommended investors hold their Vital Farms shares in August.
Another egg giant, Post Holdings, saw its stock rise by 26%. Post Holdings has tracked the S&P 500 all year, hovering above it. Cal-Maine Foods showed a more gradual upward trend with some volatility in the summer. Meanwhile, Vital Farms experienced dramatic increases in stock value, including an early May price bump from $29.91 to $37.97 following a glowing earnings call.
Uptakes on the Outbreaks
Avian flu outbreaks last year destabilized traditional egg supplies, while inflation was leading to record-breaking egg prices. At the same time, Vital Farms’ earnings per share skyrocketed.
Vital’s supply chain was resilient thanks to the company’s open-air philosophy. In other words, by virtue of being pasture raised, their hens were socially distanced.
By comparison, an avian flu outbreak at Cal-Maine's caged Kansas facilities late last year led to the loss of nearly 700,000 laying hens, almost 1.6% percent of Cal-Maine’s total flock. Post Holdings also reported losses in December as well, and again earlier this year, when illness wiped out 14% of its egg-laying hens.
Vital may have actually benefited from these disruptions – when supplies slowed for others, Vital's shelf availability kept steady. This strength made Vital Farms both a hot ticket and a reliable staple stock for investors. Vital Farms, which made its initial public offering in 2020, is now the largest pasture-raised egg producer in the country.
Pricier by the dozen
The success of Vital Farms' premium pricing is a testament to the company’s divergent strategy. A dozen Vital Farms eggs can cost more than $11, but modern consumers are willing to pay extra for the promise of ethical food production practices.
With their distinct packaging, clear mission statement and eye-popping prices, Vital also benefits from increasing brand awareness.
Vital Farms’ quality stood out to retail investor Guarav Kumar, the founder of the data security startup Dassana.
“I have bought eggs from Safeway, Whole Foods, and Sprouts Farmers Market in the past,” Kumar said. “There is virtually no difference in the eggs – except for Vital Farms, which have a firmer shell and bigger eggs. When you make an omelet, you can tell the difference.”
After looking at Vital Farms’ financial statements and seeing healthy financials, Kumar decided to invest. Kumar said he has confidence in the company’s momentum, despite market mood swings.
Vital Farms' revenue was up 30% in the first half of 2024, and analysts are optimistic that it will continue to rise.
Cracks in the market
To be sure, Vital Farm’s success does not mean its stock is without risk.
Vital Farm's president and CEO, Russell Diez-Canseco, announced in August plans to expand its farm network and build a new facility in Indiana, among other growth-related expenses. Despite boasting strong demand, the average share price decreased by 26% between July and August – a sign that the news spooked some investors.
McGinley expects Vital’s margins to decline in the second half of the year due to this increased spending on marketing, infrastructural investment and higher maintenance costs, but he isn’t worried.
“We don't view this sequential decline or the increase in capex for building a new production facility as a cause for concern and believe it is vital to make these investments to sustain momentum in distribution growth, increase household penetration, and drive package velocities higher,” McGinley wrote.
If Vital Farms wants to keep growing and maintain their profitable market niche, they need to keep up with demand. As of September, demand for cage-free eggs still outpaces supply, according to USDA data. And Vital Farms might not have the market cornered forever – Cal-Maine announced at the beginning of 2024 that it was investing in cage-free egg production.