Shares of "better for them" pet food maker Freshpet (FRPT 2.09%) were down by 19% as of 1:50 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence.
While the company's fourth-quarter earnings report was generally impressive, the shares had previously been priced for near perfection, and the figures Freshpet delivered didn't quite meet analysts' optimistic estimates. The consensus expectations had been for earnings of $0.38 per share on revenue of $263.97 million, but Freshpet reported earnings of $0.36 per share on revenue of $262.71 million.
Freshpet's quarter was better than the market's reaction implies
Freshpet's premium fresh and refrigerated pet food options have quickly become a hit among pet owners looking to take better care of their furry friends.
Their popularity continued to grow in Q4 as sales increased by 22%. Powering that top-line growth were Freshpet's 17% increase in its household penetration rate and its 18% rise in total distribution points.
Better still, the company's adjusted gross profit margin ballooned from 41.1% last year to 48.1%, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin rose from 14.5% to 20%.
Looking ahead, management expects sales to grow between 21% and 24% in 2025, and believes it will generate positive free cash flow (FCF) by 2026. That latter development would be fantastic for the company, as positive FCF would allow Freshpet to grow without further diluting shareholders.
The company's total outstanding share count has risen at an annualized rate of 6% over the last five years, and it's set to increase again in 2028 due to a convertible bond offering, which will further dilute shareholders. Making matters worse, even if Freshpet doubled its current net income margin to 10%, its stock would still be trading at roughly 56 times earnings.
There is much to love about Freshpet's business and mission. However, interested investors will need to be patient and give this steadily maturing stock a long leash.
