Karat Packaging makes its living producing a product that many of us concerned about the environment want to eliminate – single-use plastics. We are interested in the Company’s leadership in developing biopolymer and other compostable materials for use in restaurants and food service setting. The Karat Earth brand is bringing, albeit slowly, environmentally sound products for a sector that is not likely to adjust its offering to consumers more interested in convenience that the environment. Karat counts among its customer the usual names in fast and casual restaurants, including Chipotle, Chili’s, TGI Fridays and Applebee’s. Approximately, three quarters of its business is the distribution third-party products and one quarter its own manufactured products sold under the Karat Earth brand.
The Company reported $423 million in total sales in the year ending December 2022, representing 16.2% growth year-over-year. Gross profit margin was 31.2% compared to 29.6% in the previous year. Unfortunately, net income grew at a slower pace to $25.8 million due to higher operating expenses. Karat converted generating $29.5 million in operating cash flow, representing a sales-to-cash flow conversion rate of 7.0%. Importantly, the Company registered 12.7% return on invested capital in the year compared to an estimated cost of capital near 9.0%. In our view, generation of strong operating cash flow and returns in excess of cost of capital bode well for future growth.
Notably, analysts are expected flat to slightly lower sales in the year 2023, but significantly higher earnings as the Company continues to drive profit margins.
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