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Why Freshpet's Stock Was Up 18% in April

By Jon Quast - May 4, 2020 at 3:21PM

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Strong revenues, a new long-term plan, and a fresh infusion of funds to support that plan have this stock trading near its all-time high.

What happened

Shares of pet-food company Freshpet (FRPT 3.05%) appreciated 18.1% in April, according to data provided by S&P Global Market Intelligence. In fact, the stock not only shrugged off March's big drop, but it also hit an all-time high in April.

When Freshpet's stock began dropping in late February, it wasn't entirely coronavirus related. The company missed fourth-quarter 2019 earnings expectations, and issued new shares of its common stock. But it appears investors have looked past these negatives to focus on ongoing operations and fresh capitalization.

A man is holding a dog.

Image source: Getty Images.

So what

In February, Freshpet reported full-year 2019 net sales of $246 million and adjusted EBITDA of $13 million. That was slightly ahead of management's guidance, but a little short of what analysts were expecting. The company simultaneously announced it was going to sell around 3.5 million new shares to raise cash. The move diluted the previous shareholders by about 10%.

These two company-specific issues partially explain why Freshpet's stock fell in March. But there was also the external factor of the COVID-19 pandemic. Freshpet's main operations are in Pennsylvania, a state that issued stay-at-home orders, which could have threatened the company's production.

However, Freshpet was able to keep operating because Gov. Tom Wolf exempted animal food manufacturing from the state's shutdown. The company took extra steps to ensure worker safety -- checking employee's temperatures, increasing distance between workers, hiring new employees, and altering hours to reduce the number of people at the plant at any one time. 

With production continuing uninterrupted, Freshpet still expects to grow net sales 26% in 2020. The prospect of continued growth despite the coronavirus is part of why the stock ran to new all-time highs in April.

Now what

Also in February, Freshpet laid out long-term growth plans to increase its pet food production capability -- but this growth will be expensive. To build its new facilities -- dubbed Kitchens 2.0, Kitchens 3.0, and Kitchens 3.1 -- the total cost could be $515 million. However, it would take production capability up to $1.2 billion in pet food annually. While that sounds good, Freshpet only had $9 million on the balance sheet at the time of the announcement. 

However, on April 20, Freshpet announced a new $165 million credit facility. Between that and the more than $200 million it took in for its newly issued shares, this growth company is well-capitalized to pursue its long-term goals.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Freshpet. The Motley Fool has a disclosure policy.

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