Bank of America sees a stabilizing ocean freight market as a positive catalyst for Vita Coco going forward. The firm on Friday upgraded the beverage company’s stock to buy and raised its price target to $12 from $10. The stock jumped more than 10% Friday to trade at about $10.95 per share. The price change and new rating is based on a higher adjusted EBITDA estimate for calendar-year 2023, because of the falling costs of ocean freight. The firm now expects earnings for the 2023 calendar-year to be $0.64 per share, up from a previous estimate of $0.46 per share. “We expect ocean freight costs to decline given that the Drewry World Container Index is 32% off its all-time highs and continuing to decline sequentially,” analyst Bryan Spillane wrote in a Friday note. It’s unlikely that falling ocean freight costs will help the company in this calendar year, as two-thirds of Vita Coco’s container needs for the remainder of 2022 are secured at contract prices. Still, BofA sees the company as solidly placed to withstand a potential upcoming economic downturn. “In addition, we think shares of COCO are well positioned to outperform in the case of a recession given the company has taken minimal pricing this year making its products more attractive to ‘price conscious’ consumers,” Spillane said. Of course, there are downside risks to the firm’s call. Inflationary pressures could get worse and push out margin recovery, or a recession could slow volume growth. In addition, competition could intensify and chip away at Vita Coco’s market share. But on the flip side, the company could see meaningful margin expansion if the costs of ocean freight decline faster than Bank of America expects. And, the company could see solid category growth and continue to increase its market share, upside risks for the call.
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