Freshpet is the leader in the fresh pet food market, as many people are willing to splurge on their pets. By Evie Liu

Americans love their pets -- so much so that many owners are treating their furry friends better than they treat themselves. Freshpet is catering to this demand by selling fresh refrigerated food for dogs and cats -- and reaping profits. While the stock has rallied over the past two years on the back of strong growth, recent volatility in the shares provides a good opportunity to step in.

Owning a pet is more popular than ever. From 1996 to 2024, the number of dog-owning households in the U.S. nearly doubled, while cat-owning households increased 56%. Today, nearly half of U.S. households own a dog and one third own a cat.

The pet care industry is expanding along with them. In the past six years alone, annual pet expenditures in the U.S. soared 66% to an estimated $151 billion in 2024, nearly half of which was spent on food, according to the American Pet Products Association. That is more than double the growth rate for consumer spending overall.

Mainstream brands like Nestlé's Purina PetCare and Mars' Petcare, which mainly sells dry kibble and canned food, continue to dominate the market. But some pet owners worry about artificial additives and a lack of quality ingredients in these products, and they're looking for freshly prepared food that is tailored for specific dietary needs.

Freshly made pet food is often a mix of fruits, vegetables, proteins, and grains that needs to stay refrigerated. Freshpet's products sound like something you can get in the regular grocery aisles -- its Nature's Fresh brand offers grain --free chicken with carrots and spinach. There's also pâté with salmon for cats.

"I would say it's very similar to trends on the human side, where people are focused on healthy eating and buying more premium, natural, organic, and clean products," says Oppenheimer analyst Rupesh Parikh , who rates the stock Outperform with a $180 price target, up 37% from Wednesday's close of $131.59.

Freshpet, founded in 2006, is now a leader in the fresh pet food market, dominating about 95% of the bricks-and-mortar sales in the U.S. with nearly $1 billion in revenue in 2024. Purely online rivals are still at a small scale and have to deliver directly from warehouses. Freshpet, by contrast, has set up a network of refrigerators at thousands of retailers across the country -- from Costco Wholesale to Walmart to Ralphs -- that are dedicated to its products, which makes them more convenient and arguably fresher.

"That was really very smart of the founders. They basically got all their products in the fridge and other competitors couldn't go in there, " says Parikh. It's a capital-intensive model, but Freshpet has been improving its margins as the investments start to pay off. The firm should start generating positive free cash flow next year, the analyst estimates.

"Freshpet is really the vanguard of this whole humanization of pets trend," says Stephens analyst Jim Salera, who rates the stock an Overweight, with a $190 price target. "It has, in a way, created this new subcategory of human-quality food for pets."

Baby boomers who are now empty nesters, and millennials delaying starting families, are among the cohorts boosting the trend. Money that would have been used to raise children has become discretionary income, and many people are willing to splurge on their pets and pay more for better-quality products.

That has led to a loyal following. In the second quarter of 2024, a little over one third of Freshpet's customers contributed to nearly 90% of its sales, and less than 3% of customers accounted for a quarter of the total sales. The latter group has grown 47% over the past year, management said during the August earnings call. They plan to keep that momentum going.

"One of the benefits of this model is very high repeat rates," Parikh says. "Once people buy this product, they're gonna continue to buy it."

Freshpet's brand recognition, broad distribution network, and investment in manufacturing capability has given it a competitive edge. Rivals like the Farmer's Dog, Ollie, and NomNomNow were founded in the 2010s, but none has reached Freshpet's scale. NomNomNow was acquired by Mars in 2022.

Freshpet also runs its own manufacturing facilities instead of contracting with others, which helps it guarantee the quality of its products -- key to a brand known for fresh food. "This kind of supply chain allows them to have very tight control over quality, presentation, and delivery, which consumers would expect when they pay for a premium experience," says Salera. This tight control has resulted in only two isolated product recalls in its history, and none since June 2022.

Sales have grown by about 30% every year since 2019 and are expected to have done the same for 2024. Wall Street analysts estimate revenue to increase at least 20% annually for the coming three years, and earnings to more than triple -- from 90 cents per share in 2024 to $3.13 in 2027.

Freshpet is set to report fourth-quarter earnings on Feb. 20. Analysts polled by FactSet expect the company to post 41 cents in earnings per share, up 32% from a year ago, and sales to grow 23% to $264 million.

Growth like that doesn't come cheap. Freshpet's enterprise value is currently five times its expected annual sales and 30 times expected earnings before interest, taxes, depreciation, and amortization, or Ebitda, for the next 12 months. While that isn't cheap, those numbers are well below their five-year average of 7.5 times and 59 times, respectively.

Investing in expensive stocks riding on momentum has its own risk. Freshpet is trading at a premium because it has consistently delivered 20%-plus top-line growth as the majority of consumer-staples stocks have experienced softness.

If that dynamic changes and sales growth slows, it would dent the stock. "Anytime you have that valuation gap relative to peers, you have to consistently be earning it," says Salera.

The stock tumbled 11.4% this past Monday as some analysts expressed concerns about decelerating growth ahead of the company's Feb. 20 earnings release. The stock will bounce back, however, if management offers a positive outlook on sales growth and earnings guidance for this year, wrote TD Cowen analyst Robert Moskow, who rates the stock a Buy with a $174 price target.

As long as America's love affair with its pets continues, that seems like a reasonable bet to make.

Write to Evie Liu at evie.liu@barrons.com

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February 14, 2025 21:30 ET (02:30 GMT)

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