People love their pets, and I’m no exception. A lot of people are able to spend a lot of money spoiling their animals, and are increasingly willing to pay a premium for healthy food that will enable them to live longer, better lives.
Today we’re going to be looking at a company that makes premium pet food, Freshpet (NASDAQ:FRPT). They have gone from a highly speculative maker of refrigerated pet food to a growth company that is finally turning into a profitable venture after years of effort.
We’re going to be considering Freshpet’s value as a growth company of note, with a particular focus on profitability and how they are going to be able to return value to shareholders.
Understanding Freshpet
Anyone who has been to a grocery store lately has noticed a stark change in the pet food section, especially dog food. While once an aisle of almost exclusively large bags and cans of pet food, more and more stores have the presence of the Freshpet Fridge, a special refrigerator which carries the important fresh pet food.
Freshpet food is sold at a premium to the more traditional foods for pets, and is aimed to offer a premium, healthier product meant to tap in to increased customer focus on health and wellness of their families and their animals.
This healthier premium pet food has been a bigger part of the long-established pet food market. In addition to the fresh pet food, Freshpet also offers fresh treats in the retail area under the DogNation and Dog Joy brands.
Consolidated Balance Sheet
|
Cash and Equivalents |
$252 million |
|
Total Current Assets |
$405 million |
|
Total Assets |
$1.5 billion |
|
Total Current Liabilities |
$90 million |
|
Convertible Senior Notes |
$394 million |
|
Total Liabilities |
$510 million |
|
Total Shareholder Equity |
$996 million |
(source: most recent 10-Q from SEC)
For a company that has had to manage through precipitous growth for years, Freshpet has one of the most sensible balance sheets I’ve seen, with a solid cash position for a company their size, and a very manageable debt through its convertible senior notes.
The one downside to be found here is that the company is trading at a price/book ratio of 6.62, which is far above the sector median. A premium may be justified in the case of companies experiencing such impressive growth as Freshpet, but this is an extreme premium, suggesting a potentially overpriced stock.
The Risks
Freshpet may have grown in a very efficient manner so far, but that doesn’t mean there aren’t risks faced by the company in going forward that prospective investors have to be aware of.
The American pet food industry is an estimated $52 billion annually, but it is also a highly competitive industry, and Freshpet isn’t the only one in the industry looking to court the growing amount of health conscious consumers.
Keeping up with the competition means Freshpet is going to have to continue to offer new and improved products, and they are going to have to continue with potentially costly marketing efforts in an effective way to keep the brand reputation in a strong position.
Inflation could be an effective problem for Freshpet, as they have to be able to pass along cost increases in input products to their customers. That might risk the company’s strong gross margins, and in general, its growth.
A global economic slowdown could also be a risk for the company. Historically spending on pet food has proven pretty resilient to economic downturns, but there is no guarantee that will be the case for premium products. Customers with less disposable income may find that they have to choose a less expensive product for their pets.
Statement of Operations – Growing to Profitability
|
2021 |
2022 |
2023 |
2024 (1H) |
|
|
Net Sales |
$425 million |
$595 million |
$767 million |
$459 million |
|
Gross Profit |
$162 million |
$186 million |
$251 million |
$182 million |
|
Operating Income |
($25 million) |
($52 million) |
($30 million) |
$6.7 million |
|
Net Income |
($30 million) |
($58 million) |
($36 million |
$17 million |
|
Diluted EPS |
(69¢) |
($1.29) |
(70¢) |
34¢ |
(source: most recent 10-K and 10-Q from SEC)
As you can see, Freshpet has experienced impressive growth in recent years, and has done it without sacrificing a strong gross margin on their sales. The company is also experiencing what many growth companies can only dream of, that moment when they finally grow into profitability and start making money instead of burning through capital. Freshpet is finally not just a growing venture, but a healthy one that is turning a profit.
Estimates are that the growth is going to continue going forward. This year the company is expected to report a revenue of $969 million and earnings per share of 70¢. That would give us a P/E ratio of 194 at current prices. Next year is a bit better, with revenue of $1.21 billion, and earnings of $1.13, which would be a forward P/E ratio of 120. That’s another metric where Freshpet is way, way higher than sector median at its current prices.
As far as returning value to shareholders, the focus is on growth right now, and necessarily should be. There is no prospect of Freshpet paying a dividend any time soon, and at current multiples it would be absolutely preposterous to expect them to consider a share buyback.
Conclusion
Freshpet is an absolute success story, and the stock price has surged as people try to get in on one of the most exciting things to happen in the pet food market in decades. That said, the prices that one has to pay to get in now are terribly high, so I have to rate the stock a hold at present.
Even for a company growing and showing profitability, there would have to be tremendous positive news to justify trading at triple digits of its forward P/E ratio, and at a high multiple to book value. I’d love to be in on this company, but not at these prices.
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