Foodservice packaging supplier Karat Packaging (NASDAQ:KRT) fell short of the market’s revenue expectations in Q4 CY2024, but sales rose 6.3% year on year to $101.6 million. On the other hand, the company expects next quarter’s revenue to be around $102.3 million, close to analysts’ estimates. Its non-GAAP profit of $0.29 per share was 18.7% below analysts’ consensus estimates.
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Karat Packaging (KRT) Q4 CY2024 Highlights:
- Revenue: $101.6 million vs analyst estimates of $102.2 million (6.3% year-on-year growth, 0.6% miss)
- Adjusted EPS: $0.29 vs analyst expectations of $0.36 (18.7% miss)
- Adjusted EBITDA: $11.31 million vs analyst estimates of $12.88 million (11.1% margin, 12.2% miss)
- Revenue Guidance for Q1 CY2025 is $102.3 million at the midpoint, roughly in line with what analysts were expecting
- Operating Margin: 7.2%, up from 4.8% in the same quarter last year
- Free Cash Flow Margin: 7.9%, down from 10.2% in the same quarter last year
- Market Capitalization: $591.4 million
“We finished 2024 with a strong fourth quarter, as sales volume grew 14 percent and net sales increased 6 percent, despite the out-of-period benefit of $4.8 million included in the prior-year quarter from online platform fees for the first nine months of 2023,” said Alan Yu, Chief Executive Officer.
Company Overview
Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.
Specialty Equipment Distributors
Historically, 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 Growth
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Karat Packaging grew its sales at an excellent 13.4% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Karat Packaging’s recent history shows its demand has slowed significantly as its revenue was flat over the last two years. 
This quarter, Karat Packaging’s revenue grew by 6.3% year on year to $101.6 million, missing Wall Street’s estimates. Company management is currently guiding for a 7% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 7.5% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and suggests its newer products and services will fuel better top-line performance.
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Operating Margin
Karat Packaging has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.4%, higher than the broader industrials sector.
Analyzing the trend in its profitability, Karat Packaging’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.
This quarter, Karat Packaging generated an operating profit margin of 7.2%, up 2.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
Earnings Per Share
We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
Karat Packaging’s EPS grew at a solid 11.4% 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.
Diving into the nuances of Karat Packaging’s earnings can give us a better understanding of its performance. Karat Packaging’s operating margin has expanded by 2 percentage points over the last two years. 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 Q4, Karat Packaging reported EPS at $0.29, up from $0.24 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Karat Packaging’s full-year EPS of $1.65 to grow 9.1%.
Key Takeaways from Karat Packaging’s Q4 Results
We struggled to find many positives in these results. Its EBITDA missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better, but the stock traded up 5.3% to $30.28 immediately after reporting. The reason is likely that the company' announced it has reduced its "dependence on China for imported goods to approximately 20 percent".
So should you invest in Karat Packaging right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.