Credit Suisse Downgrades Freshpet Following Q3 Results, Q4 Outlook

• Freshpet Inc FRPT shares have plummeted 43 percent in the last three months, from $14.60 on August 11.
• Credit Suisse’s Robert Moskow downgraded the rating on the company from Outperform to Neutral, while reducing the price target from $19 to $9.
• The company’s 3Q GM and EBITDA missed badly, while 4Q outlook indicates a weaker-than-expected performance in 2016, Moskow said.

Freshpet reported its 3Q results broadly in-line with lowered forecasts, while gross margin and EBITDA were substantially below expectations, analyst Robert Moskow mentioned.

The company’s sales grew 36 percent to $30.6M, marginally missing the 39 percent pace year-to-date. Gross margin came in at 45.9 percent, significantly short of Credit Suisse’s estimate of 49.3 percent. Adjusted 3Q EBITDA was reported at $2.3M, well below Credit Suisse’s estimate of $4.3M.

“New store locations fell below expectations and the velocity of the core “roll” product hit a soft patch due to price elasticity on beef. The shredded “dry” test achieved its revenue target, but it caused significant manufacturing inefficiencies and dilution to the gross margin,” Moskow stated.

Freshpet’s revenue guidance for 4Q implies a significant slowdown in growth to 20 percent, indicating a weaker 2016 than was expected. Management said it could continue to feel gross margin pressure until 3Q16, “which is when its new production line comes fully up to speed,” the analyst noted.

The revenue estimates for 2015 and 2016 have been reduced to $116M and $137.5M, respectively. The EPS estimates for 2015 and 2016 have been reduced from -$0.12 to -$0.25 and from $0.04 to -$0.14, respectively.

“We have also lowered our longer-term projection for franchise revenue to $230 million, down from $330 million,” Moskow stated.