The phrase “a dog’s life” implies misery, but Freshpet (FRPT) hopes to change that — not only for the beloved pooches of the world, but holders of the company’s stock as well.
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The Bedminster, N.J.-based pet food specialist boasts steam-cooked, grain-free and antioxidant-rich meals for canines as well as cats. Investors also may be in for a treat, too, as Freshpet stock is setting up after an earnings beat-and-raise earlier this month.
A change in narrative drove Freshpet’s 53% stock market surge in 2024 to a two-year-plus high. Investors noticed improving profitability as the company consistently grew revenue above 25% — for 24 quarters in a row.
That pace especially impressed Wall Street because inflation hurt far-larger peers.
“The market likes it more that Freshpet has been delivering growth,” Morningstar equity analyst Kristoffer Inton told Investor’s Business Daily. “Broadly, consumer companies have seen flat or even negative revenue growth. Volumes have been declining, prices have been high and consumers have pulled back.”
A Rare Breed
This has made Freshpet more appealing as a “rare name in the sector with high growth,” Inton added.
Take a look at its rivals: General Mills (GIS) reported falling sales for the last three quarters, while Nestle (NSRGY) posted revenue drops the latest two periods. Meanwhile, J.M. Smucker (SJM) saw sales drop in three of the last four quarters.
Those packaged-food giants own the Blue Buffalo, Purina and Milk-Bone pet food brands, respectively. Of course, unlike Freshpet, their vast product portfolios cater to two-legged creatures as well.
Further, Freshpet exclusively focuses on “fresh” pet food made with fresh meat, vegetables and fruits. Its products naturally carry a premium vs. the mostly “shelf stable” products from its more mature rivals, though some are starting to encroach on the fresh pet food market.
While Freshpet currently dominates the fresh pet food market, there are a number of smaller players trying to break into the game. They include The Farmer’s Dog, Ollie and Nom Nom.
The company declined to comment directly for this story.
Freshpet Stock Rebounds Near Buy Point
Freshpet stock was eyeing a 136.35 buy point in a seven-week consolidation and finally ventured above that entry Friday. Shares jumped above the 50-day and 10-week moving averages when the company reported a second-quarter earnings beat on Aug. 5. After a brief pullback in mid-August, the stock bounced back above those support levels.
As of Aug. 22, Freshpet stock is up more than 80% from a cup-with-handle breakout it reached last December, according to MarketSurge. The intervening period includes a 20% earnings gap-up in late February and another 10.5% earnings surge in early May, before Freshpet started to consolidate gains.
The relative strength line for Freshpet stock has risen to its highest level since 2021, a favorable sign. But the RS line remains far below all-time highs. That strength indicator, the blue line in the chart above, shows Freshpet stock’s outperformance vs. the S&P 500 index.
Eight analysts raised their price targets on Freshpet stock after the most recent earnings report, according to FactSet, and no one cut. On average, the analysts hold an overweight rating on shares, with a $145.59 price target, suggesting further potential upside for this packaged food play.
Freshpet stock’s 2024 gains through Thursday outpace those of all the Magnificent Seven stocks, except for Nvidia (NVDA).
Bucking the trend on Wall Street, Morningstar’s Inton warns that expectations for Freshpet stock are lofty. He flags valuation and other concerns, including potential competition.
Targeting The ‘HIPPOHs’
Increasingly, Freshpet focuses on its heaviest users, which it ironically calls HIPPOHs. It’s an acronym standing for high-profit, pet-owning households. Freshpet describes high-profit households as those earning more than $80,000.
“Our heaviest users are growing even faster than the total user base,” Freshpet Chief Executive William Cyr said on the company’s recent earnings call. He added that HIPPOHs make up 37% of the 12.8 million households using Freshpet products — but they accounted for 89% of second-quarter sales.
By 2027, the company is targeting 20 million households. Citing a 2022 survey, Freshpet expects the total addressable market for fresh pet food to reach 46 million households by end of this decade, up 18% from 39 million in 2021.
Some underlying assumptions give Inton pause.
“There’s some debate about how big that fresh pet food market can be,” he told IBD. “That’s where I’m a little more skeptical than the market is. The Freshpet stock price is implying there’s a lot of growth left.”
Despite stubborn inflation, high-income customers have shown a willingness to pay up for fresh pet food. Inton said he is unsure the broader market will do so.
Higher Volumes Drive Freshpet Earnings
In the second quarter, Freshpet sharply pared net losses to $1.7 million from $17 million a year ago. That followed a surprise profit of $18.6 million in the first quarter vs. expectations for a $10.6 million loss. In both quarters, the company saw margins expand and hiked its full-year outlook.
Volume gains “entirely” drove Freshpet’s second-quarter growth, the company said.
“There was no impact from pricing or mix this quarter,” Cyr said on the earnings call. Amid stubborn inflation, the company saw “value-seeking consumers move up to larger sizes” of Freshpet products rather than buying less.
Freshpet’s pet food, made with fresh and wholesome ingredients, tends to carry premium prices. Its “Chicken & Turkey Recipe With Veggies” costs $10.99 for a one-pound pack at PetSmart.
Analysts now expect the pet food maker to deliver an annual 2024 profit of 73 cents per share after seven years of losses, FactSet shows. They expect Freshpet earnings to surge 81% next year.
Freshpet Stock: A Potential M&A Target
In April, General Mills acquired Edgard & Cooper, a European brand that makes fresh pet food, similar to Freshpet. And like Freshpet, Edgard & Cooper uses chilled trucks and refrigerators to ensure their products don’t spoil on the way to customers. General Mills also acquired Blue Buffalo, whose pet foods use real meats, in 2018.
Could Freshpet become a merger and acquisition target? Inton believes it is on the radar.
 “It makes sense where a big consumer company might take a shine to it,” he said. “When you are delivering this much growth, creating somewhat of a new category, anyone who is in pet food is definitely going to keep an eye” on Freshpet.
Still, he cautioned, “there are puts and takes about whether it gets acquired.” Freshpet’s refrigerated portfolio may not quite align with the shelf-stable focus of consumer conglomerates, Inton explained.
That leads right up to his other major concern. Thus far, competition has mostly come from startups selling directly to consumers. That puts the startups at a disadvantage to Freshpet, which sells its products in 25,281 North American stores, including Kroger’s (KR) Ralph’s outlets, Walmart (WMT) and Target (TGT).
But more deep-pocketed rivals with superior distribution networks have taken note of Freshpet’s success — both in terms of sales growth and swelling margins. They could become significant rivals, Inton said.
Last year, General Mills’ Blue Buffalo tested fresh pet food in 200 stores. That was seen in some quarters as a threat to Freshpet.
Premium Pet Food Innovation And Challenges
Freshpet is practically creating a new category of premium, fresh pet foods, industry watchers say. They see Freshpet well positioned at the intersection of favorable macro trends: rising pet ownership, the so-called “humanization of pets,” and the trend in natural foods.
The 2023-24 American Pet Products Association survey found that two-thirds of U.S. households, or 86.8 million, own a pet. They spent $147 billion on their pets in 2023, a 7.5% increase from 2022. That spending is expected to rise further to $150.6 billion in 2024.
Increasingly, people see their pets as family members. They’re more willing to spend not only on food, but also on vitamins, weight-loss diets, calming supplements, travel and insurance for their pets.
But Freshpet stock investors should brace for slower growth ahead. There are fears that beyond the footprint in cities and suburbs, rural expansion could be tougher going. In a telling sign, Freshpet is looking to add more refrigerators in existing stores.
“What I’ve gleaned from Freshpet’s commentary is they’ve probably already got the lowest-hanging fruit,” Inton said.
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