Stock Story -
Foodservice packaging supplier Karat Packaging (NASDAQ:KRT) fell short of analysts' expectations in Q2 CY2024, with revenue up 3.5% year on year to $112.6 million. It made a non-GAAP profit of $0.49 per share, down from its profit of $0.69 per share in the same quarter last year.
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Karat Packaging (KRT) Q2 CY2024 Highlights:
- Revenue: $112.6 million vs analyst estimates of $113.9 million (1.1% miss)
- EPS (non-GAAP): $0.49 vs analyst expectations of $0.60 (17.6% miss)
- Gross Margin (GAAP): 38.5%, in line with the same quarter last year
- EBITDA Margin: 13.9%, down from 19.4% in the same quarter last year
- Free Cash Flow of $14.2 million, up 152% from the previous quarter
- Market Capitalization: $557.9 million
Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.
Specialty Equipment DistributorsHistorically, specialty equipment distributors have boasted deep selection and expertise in sometimes narrow areas like single-use packaging or unique lighting equipment. Additionally, the industry has evolved to include more automated industrial equipment and machinery over the last decade, driving efficiencies and enabling valuable data collection. Specialty equipment distributors whose offerings keep up with these trends can take share in a still-fragmented market, but like the broader industrials sector, this space is at the whim of economic cycles that impact the capital spending and manufacturing propelling industry volumes.
Sales GrowthA company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Luckily, Karat Packaging's sales grew at an exceptional 14.5% compounded annual growth rate over the last five years. This is encouraging because it shows Karat Packaging's offerings resonate with customers, a helpful starting point.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Karat Packaging's recent history shows its demand slowed significantly as its revenue was flat over the last two years.
This quarter, Karat Packaging's revenue grew 3.5% year on year to $112.6 million, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 9.8% over the next 12 months, an acceleration from this quarter.
Operating Margin Karat Packaging was profitable over the last five years but held back by its large expense base. It demonstrated mediocre profitability for an industrials business, producing an average operating margin of 8%.
Looking at the trend in its profitability, Karat Packaging's annual operating margin might have seen some fluctuations but has remained more or less the same over the last five years, which doesn't help its cause.
In Q2, Karat Packaging generated an operating profit margin of 9.9%, down 2.4 percentage points year on year. Since Karat Packaging's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.
EPSAnalyzing revenue trends tells us about a company's historical growth, but earnings per share (EPS) growth points to the profitability of that growth–for example, a company could inflate sales through excessive spending on advertising and promotions.
Karat Packaging's EPS grew at a remarkable 13.6% compounded annual growth rate over the last two years, higher than its flat revenue. This tells us management responded to softer demand by adapting its cost structure.
We can take a deeper look into Karat Packaging's earnings to better understand the drivers of its performance. While we mentioned earlier that Karat Packaging's operating margin declined this quarter, a two-year view shows its margin has expanded 3.1 percentage points. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
In Q2, Karat Packaging reported EPS at $0.49, down from $0.69 in the same quarter last year. This print missed analysts' estimates, but we care more about long-term EPS growth than short-term movements. We also like to analyze expected EPS growth based on Wall Street analysts' consensus projections, but there is insufficient data.
Key Takeaways from Karat Packaging's Q2 Results We struggled to find many strong positives in these results. Its EPS missed and its revenue fell short of Wall Street's estimates. The stock remained flat at $27.99 immediately after reporting.
