Freshpet, Inc Has Problems You Want To Own Freshpet, Inc (NASDAQ: FRPT) has problems but they are, ultimately, good problems to have. To start, demand for the product is so high the company literally can not keep up...

Freshpet, Inc Is Running Against The Wind

Freshpet, Inc (NASDAQ: FRPT) has problems but they are, ultimately, good problems to have. To start, demand for the product is so high the company literally can not keep up with it. That's why they started to expand capacity last year and that leads to the other problems. Supply chain headwinds and materials shortages have caused a delayed start to that expanded capacity that is being coupled with rising inflation. Rising costs for wages and ingredients are cutting into the bottom line even as the company's growth efforts are thwarted. The good news is that these headwinds will dissipate, revenue will continue to grow, cost-leverage will return and the post-release sell-off in share prices will soon like what it is, a knee-jerk reaction to news and entry point for opportunistic investors.

"Despite unprecedented supply chain challenges, Freshpet's long-term growth model remains intact," commented Billy Cyr, Freshpet's Chief Executive Officer. "Like everyone else, we are facing extraordinary labor and material shortages, and accelerating inflation that have modestly delayed the start-up of new capacity and increased our costs more rapidly than we anticipated -- causing short-term challenges that we are addressing. However, the long-term trends driving Freshpet's growth remain strong, and - thanks to our aggressive capacity expansion initiatives and the investments we made in maintenance, training, and automation in Q3 -- we have never been better positioned to fulfill our mission of 'changing the way people nourish their pets forever' than we are today."

Supply Chain Headwinds Cut Into Freshpet Results

Freshpet had a good quarter but one deeply impacted by supply chain headwinds. The $107.59 million in revenue is up 27.8% from last year and 65% versus two years ago but is down sequentially and 700 basis points short of the Marketbeat.com consensus. The takeaway is that business is strong and could have been stronger. It is unlikely the company will "recapture" that lost growth but it is safe to assume it has only been postponed.

Moving down to the earnings, the company reported a 530 basis point contraction in gross margin that can only be partially blamed on expansions plans. The cost of capacity expansion did play a role in the margin loss but higher wages and rapidly accelerating ingredient costs are a bigger worry. On the bottom line, the company reported a GAAP loss of $0.05 per share versus last year's profit and missed the consensus by a dime.

Looking forward, the news is just as dismal, at least for now. The company decreased the outlook for both revenue and earnings suggesting the headwinds were not only still in place but still accelerating as well.

The Analysts Still Like Freshpet

The analysts still like Freshpet but there are lowering their price targets. At least three sell-side analysts have come out since the earnings report, 2 Overweight and 1 Sell, to lower their price target. The consensus of these three is near $153 and assumes 15% of upside compared to the $178 Marketbeat.com consensus estimate which implies 38% of upside for the stock.

The Technical Outlook: Freshpet Confirms Support

Shares of Freshpet started the session following the release with a loss greater than 15% but buyers were quick to step in. Price action is making a strong move up from the opening level, near $124.50, confirming support at that level. If support is able to hold, as we think it will, price action will more than likely consolidate at these low levels until there is some indication supply-chain headwinds for Freshpet are subsiding. More importantly, positive news about the capacity expansion at the new location will be a catalyst for higher share prices.