The Vita Coco Company Inc. (COCO - Get Rating) is a forerunner in the functional beverage category. Its brands include Vita Coco, the leading coconut water; Runa, a clean energy drink; Ever & Ever, sustainable enhanced water; and PWR LIFT, protein-infused water.

The stock has gained 5.1% year-to-date and 31.2% over the past three months to close yesterday’s trading session at $11.74. On July 8, shares of COCO soared following a rating upgrade from Bank of America, citing controlled transportation costs as the reason. The investment bank upgraded the stock to “Buy” from “Neutral” and increased the price target to $12 from $10.

However, numerous competitors are quickly gaining headway in the highly competitive beverage industry, threatening COCO’s growth trajectory. The growing popularity of sparkling water drinks may have an influence on demand for COCO brands.

Here’s what could shape COCO’s performance in the near term:

Premium Valuation

In terms of forward non-GAAP P/E, the stock is currently trading at 35.58x, 103.2% higher than the industry average of 17.15x. Also, its forward Price/Cash Flow of 43.45x is 224.5% higher than the industry average of 13.39x. Moreover, COCO’s forward Price/Book of 4.35x is 50.6% higher than the industry average of 2.89x.

Mixed Profitability

COCO’s trailing-12-month asset turnover ratio of 1.99% is 144.1% higher than the industry average of 0.82%. Its trailing-12-month ROC and ROE are 35.9% and 37.7%, higher than its industry averages. However, its trailing-12-month gross profit margin and net income margin are 18.7% and 4.5% lower than their respective industry averages.

Consensus Rating and Price Target Indicate Potential Upside

Each of the five Wall Street analysts that rated COCO rated it Buy. The 12-month median price target of $13.60 indicates a 15.8% potential upside. The price targets range from a low of $12.00 to a high of $15.00.

POWR Ratings Reflect Uncertainty

COCO has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. COCO has a C grade for Quality which is justified given its mixed profitability.

Of the 35 stocks in the A-rated Beverages industry, COCO is ranked #25.

Beyond what I’ve stated above, you can view COCO ratings for Growth, Stability, Value, Momentum, and Sentiment here.

Bottom Line

COCO is expected to witness robust growth over the long term as it has been developing ancillary healthy beverages to increase its market reach. However, its negative profit margins, rising competition, and lofty valuation could weigh on its price performance. So, we think investors should wait before scooping up its shares.

How Does The Vita Coco Company Inc. (COCO) Stack Up Against its Peers?

While COCO has an overall C rating, one might want to consider its industry peer, Coca-Cola Consolidated Inc. (COKE - Get Rating), Embotelladora Andina S.A. (AKO.B - Get Rating), and Primo Water Corporation (PRMW - Get Rating), which have an overall A (Strong Buy) rating.

COCO shares were unchanged in premarket trading Tuesday. Year-to-date, COCO has gained 5.10%, versus a -18.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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