Stock market analysts have long maintained that no one goes broke by underestimating how much money Americans will spend to pamper their pets.
For proof, there is the $125 billion that Americans are expected to spend this year on pet food and treats.
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There’s also Chewy (CHWY) , the pet-supply retailing giant that opened in 2011, went public in 2019, and which today boasts a market capitalization of roughly $20 billion.
Yet in the dog-eat-dog world of pet-food companies, the giant players dominate, and at least one industry watcher believes one well-known brand name is struggling amid the industry’s big dogs.
Freshpet cuts its outlook for the year
Freshpet Inc. (FRPT) is a leader in the “fresh pet food” category, which typically features high-end food for dogs and cats made with natural ingredients and without additives and preservatives, cooked in small batches at lower temperatures to retain nutrients.
In May, the company said it was cutting its outlook for the year as if first-quarter conditions would continue for the whole year.
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Freshpet now expects sales for 2025 to come in between $1.12 billion and $1.15 billion, down from a prior range of $1.18 billion and $1.21 billion.
Veteran stock analyst and New Constructs research firm President David Trainer says the company’s stock is a barking dog with fleas.
It’s “losing a lot of money [at a] stock price that implies they’re going to make a lot of money and take huge amounts of market share away from the firms that provide the much higher volume sales of food,” he explains.
New Constructs combines discounted cash-flow analysis and forensic accounting to evaluate securities on a scale of “most attractive” to “most dangerous.”
SumZero routinely rates the firm’s stock-picking at or near the top of multiple investment categories, most notably consistently leading in consumer discretionary stocks. SumZero is a buy-side community in which more than 15,000 professional portfolio managers compete for rankings.
Freshpet trading at $80, valued at less than a buck
Trainer featured Freshpet in “The Danger Zone” on the May 12 edition of Money Life, but he first singled the stock out in the fall of 2022. He is focusing on it again now because he believes the shares – trading around $80 – are worth “less than a dollar.”
Trainer says he loves the idea of gourmet dog food (full disclosure: the author of this piece feeds Freshpet regularly to a 10-year-old, six-pound Yorkie) and believes there’s a market for the products.
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Yet Trainer says he dislikes that Freshpet has persistently high operating costs, is burning hard through its cash, has a lagging market share, faces more profitable competition, and has “a stock valuation that implies Freshpet will grow its market share by seven times while also growing profit levels that the company has never seen before.”
“They’ve got the lowest amount of market share [among pet-food producers], and yet the stock price implies they’re going to move up to third place, also dramatically improving profits,” Trainer notes.
He explains how growing the bottom line while improving market share is a tough task for all companies, because those actions require different things. Companies often take market share by reducing prices, thereby cutting profitability.
Freshpet is looking up at virtually the entire pet-food business when it comes to market share, according to Research and Markets, which pegged the company’s global market share at 1% in 2023. The big dogs were Nestle Purina with a 32% market share, followed by Mars at 29%.
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“I think Freshpet has been employing this ‘Let’s lose money to get market share’ strategy for a long time,” Trainer says. “And they are growing sales. But the stock price and implies that they’re going to be able to dramatically 700% improve market share while also dramatically improving profits. We just don’t see how that’s possible.”
Trainer notes that if Freshpet’s margin improves slightly, but they just reach consensus levels of growth, the stock would be worth $26 per share, but he puts the company’s economic book value – its “no-growth value” – at zero.
Trainer adds that he doesn’t expect the outcome to be quite that dire – and suggests that Freshpet could be a takeover target for a bigger food company that wants its footprint in grocery stores before it reaches catastrophe. But he says you can’t have a small player “whose stock price implies it is as big as the whole market.”
