Freshpet: A Fresh Time To Buy Into This Growth Story? Freshpet is pulling back after a weaker-than-expected report but there are signs the stock is bottoming and expected improvements in the margin is coming.

If you are wondering if the Freshpet (NASDAQ: FRPT) growth story is over it isn't. The company is having some trouble with execution but it is clearly an in-demand product with value to investors. The question is whether or not the company can work through its growing pains or will result in the sale of the company which is being explored. Either way, it's a win for investors because the stock is trading at the lowest levels in over two years and there are signs that profitability will improve in the coming quarter.

Freshpet Is Looking For Strategic Alternatives

The number one indication that Freshpet is starting to take its cash flow problem seriously is the hiring of a new CFO. The CFO is in charge of cash flow, keeps track of spending and will be a great benefit to the business. The new CFO is Todd Cunfer, formerly of Simply Good Foods, so he brings a fair amount of experience in premium-branded packed consumer goods. This step is hand-in-hand with the company's Operational Improvement Plan which is focusing on margin expansion in three ways that include improving the fill rate, logistics efficiencies, and reducing waste.

Looking at the Q3 results, the company needs to get a grip on margins very quickly. The Q3 period was both great and dismal for the company with revenue growth not only accelerating to 40.6% YOY from the previous quarter's 34.2% but it is the fastest pace of growth in the last 4 quarters and outpaced the analyst's consensus by 200 basis points. In this light, the widening loss and narrowing adjusted margin is a real concern for investors. The net loss widened to $18.4 million versus only $2.1 million in the previous quarter while adjusted EBITA came in at a mere 26% of last year's take.

One reason for the decline in margin is startup costs. Startup costs for the new plants are included in both the GAAP and adjusted figures and come in at $8 million for the quarter. Even so, adding this back into the results still leaves a wide margin of difference between the earnings and Marketbeat.com consensus figures that can be attributed to ingredient inflation, labor, and quality and only one of those issues is under the company's control. SG&A also played a role, increasing by $18 million over the past year on increased logistics and media spending.

Freshpet Sticks To Its Underlying Guidance

Freshpet reiterated its underlying guidance for revenue and adjusted EBITDA only changing the figure to represent the new methodology which includes the impact of startup costs. The real news in the guidance, however, are plans to reduce CAPEX by $130 million over the next 4 quarters. That alone could put the company into profitability and when coupled with the other aspects of operational improvement could produce some impressive bottom-line results in 2023. The analysts were still rating the stock a Moderate Buy going into the report with no commentaries in the previous 60 days so this news could spark some bullish reevaluations. The current consensus price target is about 30% above the pre-release price action so there is already some value to be found.

The Technical Outlook: Freshpet Is Bottoming

The weekly chart of Freshpet shows a stock that is bottoming but not fully bottomed yet. The price action is down in the wake of the Q3 report which is in line with the prevailing trend but there is strong support at the $40 level. If the market does not support the stock at the higher levels near $55 a move back down to the $40 level is possible. In this scenario, a bounce from the $40 could be a trigger for entry while in the other, a move above or outside the prevailing downtrend could be the same.