Shareholders of Freshpet would probably like to forget the past six months even happened. The stock dropped 54.8% and now trades at $72.17. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Freshpet, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Freshpet Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why there are better opportunities than FRPT and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
With $1.01 billion in revenue over the past 12 months, Freshpet is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers. On the bright side, it can grow faster because it has a longer list of untapped store chains to sell into.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Freshpet’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.9%, meaning it lit $7.94 of cash on fire for every $100 in revenue.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Freshpet’s five-year average ROIC was negative 2.7%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.
Final Judgment
Freshpet’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 54.4× forward P/E (or $72.17 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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