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This Pet Stock Can Be an Investor's Best Friend

By Rick Munarriz – Aug 4, 2020 at 9:35AM

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A high-end pet food company is hitting all-time highs after another blowout report.

We've always loved our pets, but we're taking the admiration of our dogs and cats to a whole new level these days. If you're a smart investor, you'll want to follow the money. Shares of Freshpet (FRPT -3.18%) hit an all-time high on Monday. The company went on to post another blowout quarter after the market close, so it's probably going to keep moving higher. 

Freshpet offers refrigerated food for dogs and cats, and there are some interesting things about its business model that set it apart from the countless other companies wanting a starring role in your pet's food bowl. We'll touch on what makes Freshpet unique shortly, but for now let's start by taking a closer look at Monday afternoon's monster financial update. 

A dog laying down in front of currency and a calculator.

Image source: Getty Images.

Going to the dogs

Freshpet served up $80 million in net sales for the second quarter, a sum that may not seem like a lot, but it's a healthy 33% increase over the prior year. You have to go all the way back to the summer of 2015 to find the last time Freshpet was growing faster than it is right now. Back then, Wall Street was settling for just $78 million on the top line.

Turning to the other end of the income statement, Freshpet earned a mere $200,000 for the quarter, but it reversed a year-ago loss. Analysts were bracing for red ink, even though Freshpet has now cranked out a profit in three of the past four quarters. 

Its guidance is also encouraging. Many companies are stashing away their crystal balls, but Freshpet doesn't mind publicly looking ahead, and it's boosting its full-year outlook. It now sees net sales of at least $320 million for all of 2020, translating into top-line growth of at least 30%. It was targeting $310 million in net sales three months ago. The $46 million that it now sees in adjusted EBITDA for the year represents a surge of better than 57% over last year's production. 

There's a lot to like here, and now is probably as good a time as any to heap some praise onto the unique model. If the brand rings a bell (even if you don't own a dog or cat), it's because Freshpet's premium-priced refrigerated food and treats are sold at leading supermarkets, discount department stores, and convenience stores. 

You will also find Freshpet stocked at all of your local pet supply stores, but the real battle here is being won at mainstream retailers. Freshpet was able to get its foot in the door at grocery stores and the discount department store chains -- and at Walmart, the world's largest retailer -- by springing for branded fridge and coolers to exclusively stock its product lines. The move makes sense. Supermarket shoppers may find it jarring to see refrigerated dog food stocked in a cooler next to the ground round.

Now that Freshpet has established a foothold in most of the retail outlets that matter, the game is practically over. Will your local grocer really install a second fridge for a second premium pet food brand? 

The secret sauce that brings this all home is the trend of humanizing our pets. The pandemic turned us into pet-craving souls, and once we've brought our new furry friends home, we want to take care of them as if they were part of the family.

Freshpet was already gaining momentum before the coronavirus outbreak. Revenue is on its fourth year of accelerating growth in net sales. With pets and the pet supply industry historically faring well even during a recession, Freshpet is positioned perfectly to cash in on today's pet humanization trend. As an investor, maybe it's time you start barking up the right tree. 

Rick Munarriz 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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