Freshpet Q1 Earnings: Stock Still Overpriced

May 03, 2022 5:02 AM ETFreshpet, Inc. (FRPT)CENT, CHWY, PETS, WOOF1 Comment1 Like

Summary

  • Freshpet delivered some mixed results for the first quarter of its 2022 fiscal year, with revenue beating expectations but earnings falling short.
  • Overall, Freshpet continues to expand at a rapid pace, but this doesn't make it a great opportunity to buy into right now.
  • The company will likely grow further, but FRPT stock looks drastically overpriced.
  • Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

Freshpet, Inc Rings The NASDAQ Opening Bell

Slaven Vlasic/Getty Images Entertainment

When looking for high growth opportunities, very few investors would think that the pet food market would be a good place to start. But one company that operates in this space that has achieved rapid expansion in recent years is Freshpet (NASDAQ:FRPT). Long term, the company will likely continue to grow, but this does not mean that it makes sense to invest in right now. Over the past few months, shares have held up well relative to the broader market. But even factoring in current growth expectations, shares of the business do look extremely pricey. Because of this, I fully expect shares to generate weak returns over an extended timeframe. And if I am correct, it will prove that recent outperformance relative to the market was just a transitory thing.

Freshpet's fundamental performance is great

Back in February of this year, I wrote my first article covering Freshpet. The company, which focuses on the $38 billion North American pet food market, already reached household penetration of roughly 4 million. Their goal is to expand that reach to 11 million households by 2025. Such a bold vision, coupled with robust fundamental growth, can inspire investors. But that doesn't mean that shares make sense to buy at this time. When I wrote about the company, I acknowledged the company's rapid expansion. But I also said that shares were incredibly expensive, with the multiples it was trading at leading me to rate the business a 'sell'. Since then, shares have declined, but only to the tune of 2.8%. That compares to the 7.8% decline experienced by the S&P 500 over the same window of time. Though to be fair, after reporting financial results covering the first quarter of the company's 2022 fiscal year, and an announcement that was made after the market closed on May 2nd, shares did sink after hours by a further 4.1%. If that decline holds, it would bring the stock down 6.8% since my last writing.

Freshpet Historical Financials

Author - SEC EDGAR Data

You will hear no argument from me that Freshpet is a rapidly growing enterprise. For the company's 2021 fiscal year, for instance, sales came in at $425.5 million. That translated to a year-over-year growth rate of 33.5%. Every year for the past several years, the business has grown, with an annualized growth rate from 2016 through 2021 of 26.8%. Clearly, the business has a vision that customers connect with. Having said that, fundamental performance has always been mixed. Strong revenue growth has been offset some by an inability on the company's part to generate a consistent profit. Even though revenue rose in 2021, the firm generated a net loss of $29.7 million. That compares to the $3.2 million loss generated in 2020. Operating cash flow also worsened, falling from $21.2 million in 2020 to just $0.6 million last year. Even EBITDA worsened, dipping from $46.9 million in 2020 to $43 million in 2021.

This kind of trend, where revenue continues to grow while the company's bottom line worsens, seems to be a new normal for the business for the moment. After the market closed on May 2nd, Management released financial results covering the first quarter of the company's 2022 fiscal year. Revenue came in strong, totaling $132.2 million. That translated to a year-over-year increase of 41.5% compared to the $93.4 million the company generated in the first quarter of the firm's 2021 fiscal year. Not only that, it also meant that the business beat analysts' expectations to the tune of $5.79 million.

Freshpet Historical Financials

Author - SEC EDGAR Data

But on the bottom line, Freshpet missed the target a bit. During the quarter, the company incurred a loss of $0.40 per share. That caused the company to miss expectations by $0.01 per share. In absolute dollar terms, the business generated a loss of $17.5 million. That compares to the $10.9 million loss achieved one year earlier. In addition to this, the company also suffered in other ways on its bottom line. In the first quarter of its 2021 fiscal year, for instance, the business saw its operating cash flow common negative to the tune of $5.5 million. In the same quarter this year, the outflow was $34.8 million. Meanwhile, EBITDA went from a positive $7.8 million in the first quarter last year to $5.1 million this year.

Although the results for the first quarter were weak on the bottom line, the company does seem to expect some improvement for the entirety of the year. At present, current expectations call for EBITDA of greater than $55 million. That would represent a roughly 28% increase over what the company achieved in 2021. It will also be based on sales greater than $575 million. That top line would represent a 35% increase compared to last year. No estimates were given when it came to other profitability metrics. Clearly, it's safe to assume that the business would generate a net loss. Operating cash flow is a trickier metric to gas on. But if we assume that it will increase at the same rate that EBITDA should, then a reading of about $39.9 million, on an adjusted basis, should be accurate.

FRPT Stock Trading Multiples

Author - SEC EDGAR Data

Using this data, we can effectively value the business. Using our 2021 results, the firm is trading at a price to adjusted operating cash flow multiple of 130.1. This drops to 101.8 if we rely on 2022 estimates. Meanwhile, the EV to EBITDA multiple should be 94.9 if we use the 2021 figures. It dropped some to 74.2 if the 2022 forecast provided by management comes in. To put the pricing of the company into perspective, I decided to compare it to four pet-oriented companies. Though I don't think that any of these are perfectly comparable, they are as close as we can get. On a price to operating cash flow basis, these companies ranged from a low of 12.5 to a high of 66.5. In this case, Freshpet was the most expensive of the group. Using the EV to EBITDA approach, the range was from 9.9 to 285.4. In this scenario, Freshpet was more expensive than three of the four firms.

Company Price / Operating Cash Flow EV / EBITDA
Freshpet 130.1 94.9
Chewy (CHWY) 66.5 285.4
PetMed Express (PETS) 15.6 11.8
Petco Health and Wellness Co. (WOOF) 14.7 16.2
Central Garden & Pet Company (CENT) 12.5 9.9

Takeaway

Based on all the data provided, I can acknowledge again that Freshpet is a rapidly growing company that would likely continue that trend for the foreseeable future. But shares are just so ridiculously pricey at this point in time. Also worth mentioning is the fact that, in addition to the company generating growing losses, it continues to dilute shareholders in order to expand. Over just the past twelve months, shareholders have been diluted by 4.2%. And that excludes the dilution that will come from the company's decision, also announced on May 2nd, to issue $350 million worth of stock, plus another $52.5 million worth if underwriters exercise their option to do so. Though this will help the company further expand, with the goal of increasing its ultimate capacity to $2.9 billion worth of product per year, with $2.6 billion of it being completed by 2025, none of this means much until we can see that shares are actually trading at realistic levels. Because of this, I still maintain my 'sell' rating on the enterprise.

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This article was written by

Daniel Jones profile picture
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Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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