05 Feb Freshpet (FRPT)

Vaccinations have arrived and we’re all saved! Well, not exactly. The rollouts seem to be taking forever – they haven’t even started here in Australia – and no one’s really sure how long they’ll last for and whether it will protect against all the different types of strains and permeations of the virus to come.

But, there’s no doubt that 2021 and 2022 will be better than 2020. We’ve got social distancing down pat, contact tracing is now a fine art, and governments and health services are much better prepared than they were when this whole hullaballoo kicked off early last year. However, there are still lots of question marks around how long Covid19 will be around with this with many scientific leaders suggesting it will be around for a lot longer than we think in one form or another.

With that in mind, it is becoming apparent to us that holding more than a few pandemic proof stocks is important for any successful portfolio. We all know the obvious ones by now. Online retailers have been smashing it over the last year, as has any company who was fortunate enough to have a click and collect system in place. Bottle shops, hardware stores, outdoor sporting equipment retailers and streaming services are others that have benefitted and could be considered Covid proof.

Today’s stock report subject is much the same. When the pandemic kicked off in full around mid-March in the US there was a surprising uplift in demand for a “product” that came from left field. People were stuck in their homes, some lonely, some with kids bored out of their minds, some looking for anything to keep them busy, others missing socialising with friends and family. So what did they do?

They all, seemingly, bought dogs and puppies. Pet stores quickly ran out of stock, as did animal shelters, pet rescue centres and private breeders. All claim that the surge in demand was off the charts. It was something the industry had never seen before. At the society for the Prevention of Cruelty to Animals in LA, for example, the number of adoptions had doubled by June and a waiting list was set up to accommodate those that missed out.

The same thing has been happening in Australia too. According to the RSPCA, dogs are being adopted out faster than they are being brought in. And the waitlist for a new puppy can be upwards of three years. It’s a global phenomenon that has continued into 2021 as the pandemic worsened across the US and Europe in particular. More people stuck at homes and more people after home companions.

Today’s stock subject, Freshpet, don’t sell dogs, however. But they do sell something which is crucial for a dogs existence. Dog food. And not just any old run of the mill dog food. It is fresh, refrigerated dog food rather than the dry or canned food usually seen on the shelves in your local supermarket. They are a market leader in the field, and they are taking advantage of a more recent trend to feed pets healthier products, that are more in line with what the families themselves eat.

This comes at a time when spending on pets during the pandemic has increased dramatically. According to the American Pet Products Association Americans will be spending a record-high $99 billion on their pets this year, with pet food sales almost doubling. And it’s not a trend that’s going to disappear once the pandemic is over. These pets will need to be fed for life. And as we have discussed many times previously the “work from home” phenomenon is here to stay, so the desire for home companions will be ongoing.

The Freshpet product combines meat with fruits and vegetables to create food and treats for cats and dogs. It is sold in refrigerated form in more than 20,000 stores across the US and Canada, with recent openings in the Netherlands and the UK. You can find it in the large chain stores such as Walmart, Target and Wholefoods, in the large pet store chains Petco and PetSmart, as well as many natural food retailers and specialty pet stores. Further international expansion is also on the cards with management looking to move into additional locations in Asia, Europe and South America in the near future.

Freshpet brought in $318 million in revenue last year. That was up by almost 30% from 2019 and has been on a similar rise for the last four years running. For the last three years revenue growth has risen by more than 20% each quarter, with margins increasing despite the affordable price point it values its products at. They are busy investing that profit back into expanding the business in an attempt to claim a larger share of the $40 billion dollar pet food industry that they only currently have approximately 1% of.

While at $150 it is a little on the expensive side, we see the upside of the stock as the real story here and have no doubt that increased earnings will account for the difference in no time. An increase in pets equals an increasing need for food. And a societal move towards treating pets as “part of the family” will see the fresh pet food business take off over the next few years. Expect the company to continue to invest heavily in the business in the near future as it attempts to establish dominance over its competitors. This news will only push the share price higher. Buy on any dips and hold.