Multi-decade high inflation has affected various businesses across sectors as rising costs have hit profitability. Freshpet, Inc. (FRPT - Get Rating) benefitted during the pandemic due to the rise in pet adoptions. However, FRPT significantly missed the consensus earnings estimate in the second quarter as it struggled with rising costs.

FRPT is engaged in manufacturing, marketing, and distributing pet food and pet treats for dogs and cats. The company’s products include dog food, cat food, and dog treats. Its products are sold under the Freshpet brand name. It also offers fresh treats across all retail classes under the Dognation and Dog Joy labels.

As inflation remains elevated, FRPT will likely face a further rise in costs. Although FRPT maintained its sales forecast for fiscal 2022, the company slashed its adjusted EBITDA guidance from the previously expected $55 million to $48 million. It reduced its capital expenditure guidance by $80 million from the prior forecast to $320 million.

FRPT’s stock has declined 51.3% in price year-to-date and 63.5% over the past year to close the last trading session at $46.41. It is currently trading 70.9% below its 52-week high of $159.67, which it hit on October 29, 2021.

Here’s what could influence the performance of FRPT in the upcoming months:

Disappointed Financials

FRPT’s adjusted selling, general, and administrative expenses increased 47.6% year-over-year to $57.96 million for the second quarter ended June 30, 2022. The company’s adjusted EBITDA declined 64.5% year-over-year to $3.85 million. Also, its loss from operations widened 180.4% year-over-year to $18.13 million. In addition, its loss per share widened 164.7% year-over-year to $0.45.

Mixed Analyst Estimates

FRPT’s EPS for fiscal 2022 and 2023 is expected to remain negative. Its revenue for fiscal 2022 and 2023 is expected to increase 36.3% and 31.1% year-over-year. It failed to surpass Street EPS estimates in each of the trailing four quarters.

Stretched Valuation

In terms of forward EV/S, FRPT’s 3.40x is 84.8% higher than the 1.84x industry average. Likewise, its 41.19x forward EV/EBITDA is 232.7% higher than the 12.38x industry average. And the stock’s 3.83x forward P/S is 193.3% higher than the 1.30x industry average.

Lower-than-industry Profitability

FRPT’s trailing-12-month net income margin is negative compared to the 5% industry average. Likewise, its trailing-12-month EBITDA margin is negative compared to the 12.42% industry average. Furthermore, the stock’s 0.51% trailing-12-month asset turnover ratio is 37.7% lower than the industry average of 0.82%.

POWR Ratings Reflect Bleak Prospects

FRPT has an overall F rating, equating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. FRPT has an F grade for Value, in sync with its stretched valuation.

It has a D grade for Quality, consistent with its lower-than-industry profitability.

FRPT is ranked #80 out of 85 stocks in the Food Makers industry. Click here to access FRPT’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

FRPT is trading lower than its 50-day and 200-day moving average of $51.82 and $84.55, indicating a downtrend. With inflation remaining at consistently high levels, FRPT is likely to suffer from rising costs and a fall in demand. Moreover, given its disappointing financials, stretched valuation, and lower-than-industry profitability, we think the stock is best avoided now.

How Does Freshpet, Inc. (FRPT) Stack Up Against Its Peers?

FRPT has an overall POWR Rating of F, equating to a Strong Sell rating. Therefore, one might want to consider investing in other Food Makers stocks with an A (Strong Buy) or B (Buy) rating, such as Grupo Bimbo, S.A.B. de C.V. (GRBMF - Get Rating), Industrias Bachoco, S.A.B. de C.V. (IBA - Get Rating), and SpartanNash Company (SPTN - Get Rating).

FRPT shares were trading at $43.70 per share on Monday afternoon, down $2.71 (-5.84%). Year-to-date, FRPT has declined -54.13%, versus a -12.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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