Shares of Freshpet (FRPT 1.46%), the maker of fresh food for dogs and cats, were soaring last month after the company reported better-than-expected, first-quarter earnings, and pet stocks rallied more broadly, potentially signaling the end to a long slump in the industry.
As a result, the stock finished May up 24%, according to data from S&P Global Market Intelligence.
As you can see from the chart below, Freshpet stock jumped following the earnings report early in the month and then continued to gain from there.
Freshpet is barking up a storm
Freshpet has delivered solid growth for years as it disrupts the massive pet food industry, but the stock's results have been mixed as its valuation seemed to get overheated a few years ago after an earlier surge following its initial public offering (IPO).
However, its Q1 earnings report showed that the company was continuing to generate strong growth on the top line, and its profitability metrics expanded significantly as it ramps up production at its company-operated kitchens.
Revenue in the quarter rose 33.6% to $223.8 million, which easily beat estimates of $216.4 million. However, what really impressed investors was its cost management as gross margin jumped from 30.3% to 39.4% due to lower input, quality, and logistics costs.
As a result, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped from $3 million to $30.6 million. On the bottom line, it flipped a generally accepted accounting principles (GAAP) per-share loss of $0.52 to a profit of $0.37, which was much better than the consensus at a per-share loss of $0.23.
Over the rest of the month, Wall Street analysts weighed in with favorable commentary, helping to lift the stock, while peers like Petco and Chewy also climbed on their respective earnings reports, showing the sector seems to be bouncing back finally.
Image source: Getty Images.
Can Freshpet keep climbing?
Freshpet reaffirmed its top-line guidance of at least $950 million, representing at least 24% growth, and it raised its adjusted EBITDA expectations from $100 million to $110 million to at least $120 million, reflecting the improvements in its cost structure.
Based on those forecasts, Freshpet trades at a price-to-sales ratio of around 7 and at about 50 times EBITDA.
Considering the company's growth rate, that looks like a reasonable price to pay for the disruptive pet stock. Keep an eye on top-line growth as that should ultimately dictate its long-term success.
