Freshpet (NASDAQ: FRPT) reported its preliminary fourth quarter numbers on Wednesday; the refrigerated pet food company is expecting net sales to be $84.5 million and adjusted EBITDA to come in at $12 million. Wall Street, however, had been expecting $88.4 million in revenue and $14.7 million in adjusted EBITDA in Q4.
Shares were down as much as 1.5% on Thursday, but actually finished the day up 2.1%.
The price action was reminiscent of what happened after Freshpet released its Q3 numbers back in early November. That report was broadly in line with expectations – which usually isn’t enough for a company that is trading at a lofty valuation – but after dipping nearly 5% after-hours, FRPT closed the next day up 6%.
The market often overreacts to the short-term hiccups that always happen with even the best growth stocks, but in Freshpet’s case, the market is rightly taking the long view.
Revenue Growth Will Pick Up
Freshpet’s full-year 2020 revenue is now projected to be $318.8 million, up nearly 30% yoy. 2020 will mark the fourth consecutive year of accelerating revenue growth. So far, so good.
But the $84.5 million in Q4 revenue would be only $300,000 above the $84.2 million it reported in Q3. You want to see strong sequential growth in highly-valued growth stocks, not just strong yoy growth.
Freshpet CEO Billy Cyr talked about why the company fell short, saying, “We continued to experience strong demand in the fourth quarter, but supply constraints limited our sales opportunity.” He added, “We are considering incremental investments in capacity expansion to ensure we meet the growing demand from families that are seeking a better-for-you alternative to feeding their pets.”
This wasn’t a demand issue, but a supply issue. It seems short-term in nature, however, as Cyr noted that “COVID-related labor disruption and severe weather impacts to our distribution network” in the back half of the quarter were largely responsible for the supply shortage.
Moreover, Freshpet is taking steps to ensure that it won’t face any long-term supply shortages. On the Q3 earnings call, the company said it had broken ground on new kitchen facility in Texas. It won’t be completed until mid-2022, but it will “almost double the size of [Freshpet’s] Bethlehem operations.”
Freshpet is Holding Back… But Not for Long
The company didn’t address its Q4 advertising spend in its release, but based on the Freshpet’s track record, it probably spent less than it originally planned to prevent demand from far outpacing capacity. On the Q3 call, Freshpet admitted that it pushed Q2 advertising into Q3, and then Q3 advertising into Q4, to avoid exceeding capacity.
You may be thinking: will Freshpet fail to fully satisfy present and future demand until its Texas facility opens in 2022?
That seems unlikely. In October, Freshpet opened a new 140,000 square-foot facility in Pennsylvania, which may take a bit of time to reach full capacity. And the COVID-related labor disruptions that held Freshpet back in Q4 should be a thing of the past once COVID-19 vaccines are widely distributed – likely in the second half of 2021.
Freshpet Shares Could Soar Over the Next 4 Years
Investors that purchased Freshpet shares in January 2017 are up more than 1,000% four years later. It’s unlikely that Freshpet goes up another 1,000% over the next four years, but if this company can maintain revenue growth of around 30% into the mid-2020s, shares could go up quite a bit.
Consensus estimates are calling for 30.4% revenue growth in 2021 and 27.4% revenue growth in 2022. It’s not far-fetched – no pun intended – for Freshpet to keep that momentum going for at least another couple of years after that.
Freshpet is still in only 3.8 million of the 63-65 million households that own a dog. The company’s economic moat in a rapidly growing industry means that Freshpet could realistically get into 10+ million households in the coming years.
How Should You Play Freshpet?
It is exciting to consider the bull case, but Freshpet is trading at nearly 250x forward earnings. If growth slows down – and doesn’t look like it will pick back up – shares would have a lot of downside.
That said, Freshpet’s bull case has a decent chance of coming to fruition. A small position would give you exposure to massive returns without much risk.
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