Another Buy The Dip Opportunity In Freshpet

Freshpet Posts Record Quarter 

Freshpet’s (NASDAQ: FRPT) Q1 results were not enough to spark a rally in the stock but they are providing a buying opportunity. The company provided mixed results to be sure but the outlook for growth is intact. If anything, the outlook for growth and profitability has improved even if the outlook is still cloudy. The only question is if inflation will cut into top-line results and right now it looks like it isn’t. Until then, we expect to see incremental revenue gains on a sequential basis and for the ever-elusive profitability to creep closer. 

The analysts still view the stock as a buy but the sentiment has slipped over the past year. The Marketbeat.com consensus rating is still a firm Buy, however, with a price target nearly 60% above the current price action. The post-release activity has been more of the same with 3 analysts out with commentaries and all including a price target reduction. The lowest is from Citigroup and the new low price target of $72, it is below the current price action, but the other two are in line with the consensus and show continued support for the company. The institutions are also bullish on Freshpet having been net-buyers the last 3 quarters and owning over 97% of the stock. 

Freshpet Has Record Quarter 

Freshpet had a record quarter in more ways than one. Not only did the company post record revenue but record quarterly growth at 41.5% over last year. The company produced $132.2 million in net revenue to beat the consensus by 450 as well. While no specific details were given, the company says gains were driven by momentum, distribution gains, and innovation but there are problems here as well. As great as the growth is, costs are still cutting into the results and the losses are widening. 

The company reported a decline in both gross and operating margin that resulted in a loss of $17.5 million. This includes expansion spending and non-cash impairments but the adjusted margin shrank considerably as well under the pressure of rising costs and increased wages. On the bottom line, the company reported -$0.40 in GAAP EPS which is only a penny below the consensus but still a big miss in light of the revenue strength. 

Freshpet To Raise Capital, Dilute Shareholder Value 

Freshpet announced it was in the process of a follow-on offering for up to $350 million worth of shares, not including additional allotments set aside for the underwriters. This is worth about 8.6% of the current market cap and will be a significant dilution of shareholder value. The upshot is the balance sheet is still sound, and leverage is relatively low, so the cash will be used primarily for expansion plans. The latest plans include a new kitchen in Pennsylvania that will be used to help increase efficiency and product innovation. 

Turning to the chart, the Freshpet market is not responding well to the news but support is still holding at a key level. That level is near $81 and has been tested repeatedly over the past few months. Assuming the market can hold above this level, we see Freshpet trending sideways within its established range. If not, price action in this stock could be in for a tumble, especially is the institutions and analysts begin to lose faith.