Amid a questionable backdrop for the U.S. consumer economy, one factor has consistently stood out from the muck: Americans love their pets. And that reality appears to have fueled Freshpet (FRPT), a pet food company specializing in fresh, high-quality offerings for cats and dogs. Following a stronger-than-expected earnings print, FRPT stock popped higher. A possible short squeeze could keep the flames burning.
For the company’s fiscal first quarter, Freshpet posted revenue of $223.8 million. That significantly exceeded Wall Street’s consensus view of $216.1 million (or a 3.6% positive surprise). As well, the tally represented a 33.6% lift on a year-over-year basis. On the bottom line, earnings per share landed at 37 cents, well above expectations calling for a loss of 19 cents.
Notably, gross margins clocked in at 39.4%, which was a significant boost from the year-ago-quarter’s print of 30.3%. Further, sales volumes also swung up to the tune of 30.6% YOY. To be fair, not everything was perfect, with management maintaining its full-year revenue guidance of $950 million. That’s slightly below analysts’ expectations.
Still, the overall sentiment was exceptionally positive, with FRPT stock rising over 10% on the Q1 disclosure. “Our strong first quarter results provide solid evidence that we can deliver our long-term financial goals– and we are now determined to prove that we can achieve this level of performance consistently over time,” remarked Freshpet CEO Billy Cyr.
Fundamentally, what distinguishes Freshpet from the competition is its focus on natural meals and treats. That’s unlike the typical pet-food company, which manufactures processed pet foods. With U.S. households showing no slowdown in pet-related expenditures, FRPT stock seems poised for stronger returns.
In that context, it’s no surprise that options traders identified Freshpet as a possible opportunity.
FRPT Stock Grabs Unusual Options Spotlight
Following the close of the Monday session, FRPT stock represented one of the top highlights in Barchart’s screener for unusual stock options volume. This data interface allows retail investors to better understand where the smart money is positioning itself.
Total volume hit 3,709 contracts against an open interest reading of 25,752. Further, Monday’s volume stood 921.76% higher than the trailing one-month average metric. As well, call volume came in at 2,142 contracts versus put volume of 1,567. On paper, this pairing yielded a put/call volume ratio of 0.73.
Peering into Barchart’s options flow screener – which filters exclusively for big block transactions likely placed by institutions – the heavy hitters appear relatively balanced between bulls and bears. However, there were more options with bullish sentiment featuring five-digit premiums than there for bearish sentiment (five transactions versus two). So, the slight edge may go to the optimists.
To be sure, it’s difficult to predict where FRPT stock may land given the wild choppiness of the price action over the past few years. However, shares did breach an important technical and psychological barrier marked by the $120 level. With that in mind, it’s possible that Freshpet could continue moving higher.
Adding to the bullish sentiment is the possibility of a short squeeze materializing. Multiple sources have FRPT stock with a short interest of between 11% to 12%. Further, many sources claim the short ratio stands at around 11 days to cover. Interestingly, Fintel reports that the short ratio may stand at 20.81 days to cover.
Either way, this is an elevated metric. What the short ratio metric indicates is the number of days required (based on average trading volume) for the bears to unwind or cover their position. Of course, the act of covering a short position requires buying the target security.
If the pessimists panic, this emotional surge could spark a feedback loop, sending FRPT stock rocketing higher.
Valuation Concerns Temper Some of the Enthusiasm
While Freshpet may be the hot ticket on the Street right now, it’s not without concerns. One of the biggest is the rich multiple. In particular, FPRT stock trades at 6.76X trailing-year revenue. That’s elevated relative to the competition.
To be fair, management as stated earlier is guiding full-year revenue to $950 million. Assuming a shares outstanding count of 48.43 million, FRPT stock would be trading at 6.17X projected 2024 revenue. That’s an improvement but not by much. Also, FRPT featured a lower sales multiple over the past one-year period.
Admittedly, then, there are some questions about FRPT stock representing a long-term investment. However, as a short-term speculation, it could be intriguing, especially keeping in mind the possibility of a short squeeze.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
