$19.00
$44.00
bear $19.00
base $35.00
bull $44.00
margin of safety $20.00
market price* $53.31
Karat Packaging manufactures and distributes single-use foodservice products (take-out containers, cups, lids, bags, cutlery, straws and tableware) for restaurants and other foodservice settings. It makes part of its range at plants in Chino (California), Rockwall (Texas) and Kapolei (Hawaii) and also sells products made by third-party manufacturers outside the United States. Revenue grew from $364 million in 2021 to $468 million in 2025, with one down year (2023, about 4%). Earnings level. We measure cash earnings to shareholders after operating cash flow, stock compensation and the equipment spending needed just to stand still. Working-capital swings are stripped out because they distort single years: 2025 operating cash flow fell to $33.8 million from $48.0 million purely because receivables and inventory absorbed about $21.8 million, while the earnings-based figure rose. Purchases of machinery are often paid as deposits before delivery, so we count those deposits as equipment spending. Operating lease payments are treated as a real cost. On that basis, cash earnings per diluted share were $0.87 (2021), $1.26 (2022), $2.03 (2023), $1.97 (2024) and $2.13 (2025). We anchor on the median of 2023 to 2025, $2.03 per share, because 2021 and 2022 were distorted by the IPO year, a heavy inventory build and the capital spending for the Texas plant. Maintenance equipment spending in 2024 and 2025 (about $3.5 million to $3.7 million) is much lower than in 2023, which is a reason not to anchor above the median. Growth. In 2025 cash earnings grew about 8% per share. The base case assumes 3% a year for ten years, below that and well below the roughly 6% annual revenue growth of 2021 to 2025, which was achieved despite the down year in 2023. We credit no market expansion, share gains, new products or margin recovery. Base case, about $35 per share: earnings grow 3% a year for ten years to about $2.73 per share and then hold flat for twenty more years, reflecting a business with repeat-purchase consumable products and 25 years of operating history, after which we assume nothing. Bear case, about $19 per share: duties and freight, already up from $14.7 million in 2024 to $29.3 million in 2025 (11.8% of sales), are not recovered in pricing. Cash earnings fall about 20% to roughly $1.62 per share, do not grow for ten years and then decline about 5% a year for twenty years. Other disclosed pressures behind this case are a dependence on suppliers outside the United States (one supplier was 11% of purchases in 2025) and recurring inventory write-offs ($0.9 million in 2025, $1.5 million in 2024 and $3.9 million in 2023). Bull case, about $44 per share: the company repeats its demonstrated 6% annual growth for ten years to about $3.64 per share, then holds flat for twenty years. What we left out. A U.S. Supreme Court ruling on February 20, 2026 went against certain tariffs imposed under the International Emergency Economic Powers Act. The company states the availability, timing and amount of any refunds is uncertain, so we assign no value to refunds. The company's second quarter of 2026 also showed an unusually high gross margin (about 57% versus about 37% in 2025) and net income of $29.3 million for the quarter, and first-half operating cash flow of $40.3 million; we cannot explain it from the filings, so we treat it as one-off and do not raise the earnings level on a single quarter. The company pays a $0.45 quarterly dividend. What would make this wrong. If duties stay near 2025 levels but customers accept price increases, results would trend toward the bull case; if duties rise further or gross margin keeps eroding as it did from 38.9% in 2024 to 36.8% in 2025, the bear case applies. Because the business is not asset-light, a sustained rise in maintenance equipment spending back toward the 2022 to 2023 pace (about $9 million to $13 million a year) would lower the earnings level by roughly $0.30 to $0.50 per share.