Karat Packaging (KRT)

Foodservice packaging supplier Karat Packaging (NASDAQ:KRT) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 8.4% year on year to $103.6 million. Guidance for next quarter’s revenue was better than expected at $123.9 million at the midpoint, 1.7% above analysts’ estimates. Its non-GAAP profit of $0.30 per share was 5.3% above analysts’ consensus estimates.

Company Overview

Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.

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.

A public competitor in the disposable foodservice products sector is Pactiv Evergreen (NASDAQ:PTVE) while two prominent private competitors are Dart Container and WinCup.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Karat Packaging grew its sales at an excellent 12.4% 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.

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 performance shows its demand has slowed significantly as its annualized revenue growth of 2.1% over the last two years was well below its five-year trend.

This quarter, Karat Packaging reported year-on-year revenue growth of 8.4%, and its $103.6 million of revenue exceeded Wall Street’s estimates by 1.3%. Company management is currently guiding for a 10% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 9.3% over the next 12 months, an improvement versus the last two years. This projection is healthy and implies its newer products and services will catalyze better top-line performance.

Karat Packaging’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 34.4% gross margin over the last five years. That means for every $100 in revenue, roughly $34.40 was left to spend on selling, marketing, R&D, and general administrative overhead.

Karat Packaging’s gross profit margin came in at 39.3% this quarter, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

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.

Looking at 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 7.5%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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 an unimpressive 4.1% compounded annual growth rate over the last two years. This performance was better than its 12.4% annualized revenue growth but doesn’t tell us much about its efficiency because its operating margin didn’t expand during this time.

In Q1, Karat Packaging reported EPS at $0.30, down from $0.40 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 5.3%. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Karat Packaging has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.5%, subpar for an industrials business.

Taking a step back, an encouraging sign is that Karat Packaging’s margin expanded by 16.2 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Karat Packaging’s free cash flow clocked in at $6.63 million in Q1, equivalent to a 6.4% margin. This cash profitability was in line with the comparable period last year and above its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Karat Packaging’s five-year average ROIC was 15.1%, beating other industrials companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Karat Packaging’s ROIC decreased by 1.7 percentage points annually over the last few years. Only time will tell if its new bets can bear fruit and potentially reverse the trend.

Karat Packaging reported $56.27 million of cash and $152 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $53.62 million of EBITDA over the last 12 months, we view Karat Packaging’s 1.8× net-debt-to-EBITDA ratio as safe. We also see its $212,000 of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Karat Packaging blew past analysts’ EPS and EBITDA expectations this quarter. We were also happy this quarter's revenue and net quarter's revenue guidance topped Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $27.34 immediately following the results.

Updated: May 10, 2025 at 10:02 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Karat Packaging.

Karat Packaging isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its projected EPS for the next year is lacking. And while the company’s rising cash profitability gives it more optionality, the downside is its low free cash flow margins give it little breathing room.

Karat Packaging’s EV-to-EBITDA ratio based on the next 12 months is 11.1x. Looking at the industrials space right now, Karat Packaging trades at a compelling valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $31.50 on the company (compared to the current share price of $30.26), implying they see 4.1% upside in buying Karat Packaging in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.