Freshpet (FRPT): Exciting Growth

Freshpet is a petfood company. It has a differentiated offering in that the food it sells is both premium and ‘fresh,' and this is where market demand is going. The critical component in much of Freshpet’s business is the fridge. It doesn’t sound like much, but within the pet food category it is, as the fridge is owned by Freshpet, which excludes other brands, giving them a potential monopoly position in fresh pet food.

• The fridge cannot be the same fridge as where human food is sold, and it is located in the pet section.

Pet food is an attractive end market which is undergoing premiumization. Owners are resistant to changing dog food, which means loyal customers once you have won them.

• Current penetration of Freshpet is low, consumer demand is high and the trend to healthy eating including pets looks to be well entrenched.

• We see Freshpet growing 25%+ for the foreseeable future, with low complexity of execution.

Operating leverage is very attractive: We expect EBITDA margin growth from ~12% to 24-25% in 5 years, there is proof in the industry that this is reasonable and had been achieved before.

We consider Freshpet a precious asset in CPG. If Freshpet continues to execute well, we do not see it remaining independent.

Potential Upside: $183 (+39%)

Sensible Downside: $98 (-26%)

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