The dairy options at your local coffee shop sometimes seem endless. Choices often include regular milk, skim milk, almond milk, soy milk, rice milk, coconut milk and oat milk. There is actually a publicly traded company that specializes in oat milk called Oatly Group AB (OTLY, Financial). The Swedish company provides a range of plant-based dairy products made from oats. It offers oat milk, oat yogurts, frozen desserts, ice creams, cooking products, whipping cream and other related products.
Founded in 1994, the company currently has a market capitalization of $1.35 billion.
Addressable market
Oatly primarily competes in the global dairy industry, which includes milk, ice cream, frozen desserts, yogurt and cheese. Retail sales of these products in 2022 were estimated to be approximately $631 billion. According to the Plant Based Foods Association, the plant-based subsegment of the dairy industry generated an estimated $2.8 billion in retail sales last year.
There appears to be growing demand for oat-based dairy products, driven primarily by sales of oat milk and related products. Oats are a popular crop that offers environmental benefits when compared to cow-based dairy products. Oats are a low-input crop that offers better crop rotation benefits, and these grains also have a longer raw ingredient shelf life when compared to animal-based dairy. This provides competitive advantages in the supply chain system. In addition, oats do not contain common allergens that are present in other plant and nut-based products. Oats also have a balanced macro-nutritional profile because they contain a high amount of dietary fiber.
Financial review
In March, the company reported fourth-quarter and full-year 2022 financial results that were not great.
For the quarter, revenue increased 13.9% in constant currency with price increases responsible for 3.9% of the gains. In the important domestic North American market, volumes decreased 0.2% with revenue gains fully attributed to a 16.2% price increase.
The company continues to lose money on a massive scale.
The net loss in the fourth quarter was $125.2 million compared to a net loss of $79.8 million in the prior-year period. The Ebitda loss for the quarter was $111.2 million, compared to an Ebitda loss of $81.8 million in the fourth quarter of 2021. The increase in losses was primarily a result of higher other operating expenses related to an asset impairment charge and other costs related to assets held for sale from the YYF asset sale transaction.
The quarterly adjusted Ebitda loss was $60.5 million, compared to a loss of $65.6 million in the year-ago period. The adjusted Ebitda loss for the entire year was $267 million. The cash burn rate for 2022 was $470.6 million when considering capital expenditures of $201.6 million. The company continues to invest heavily to support its long-term growth.
As of year-end, the company had cash and cash equivalents of $82.6 million and total outstanding debt of $52.6 million. The company also had assets-held-for-sale totaling $142.7 relating to the YFF transaction, in which the company is selling certain factory facilities. Subsequent to the end of the quarter, the company received $425 million in financing that it hopes will sustain operations until positive free cash flow can be achieved.
Valuation
Oatly is expected to continue to generate net losses. Consensus earnings per share estimates for 2023 are a loss of 42 cents and for 2024 the estimate is a loss of 23 cents. The company is expected to generate negative Ebitda again in 2023 and minimal positive Ebitda in 2024 and 2025, which makes the company difficult to value.
The stock sells at a current price-sales ratio of 1.5, which is above the sector media of approximately 1.15.
Oatly’s average price target by the four Wall Street analysts that cover the company is $4.88 with a high target of $7 and a low target of $2.50.
Guru trades
A guru who has recently purchased the stock is Jim Simons (Trades, Portfolio)' Renaissance Technologies, while Baillie Gifford (Trades, Portfolio) reduced its holding.
Summary
Oatly does have a few tailwinds in its favor, including the possibility that production capacity increases occur faster than expected, inflation pressures are expected to moderate and continued strong growth in the plant-based dairy markets.
Headwinds include a possible growing cash burn rate, delays in increasing production capacity is expected and ongoing intense competition, particularly from larger food companies.
Oatly CEO Toni Petersson seems to be optimistic about it prospects. He said, “Our supply chain is back on firmer footing, we have clear line of sight to reaching profitability, and we have the liquidity needed to fully fund our growth investments and reach financial self-sufficiency. Therefore, we believe we are well-positioned to start playing offense in 2023. Our teams will be focused on fully capturing the underlying global demand for our products while continuously improving our supply chain. We expect this focus to enable us to move along our path to profitability, set up fiscal 2024 for positive adjusted EBITDA, and drive sustainable, long-term shareholder value creation."
With ongoing cash burn rates, Oatly remains a speculative stock. However, for investors that believe in the future of plant-based dairy as well as have confidence in management to produce sustainable profitability, it may be a good long-term opportunity.
