The broad market is in correction mode as recession fears sweep through it, but Freshpet (NASDAQ: FRPT) is already rebounding because of its performance and improved operational quality. The broad market environment may impact the price action in FRPT in the near term. Still, the industry-leading growth, leverage gains, and rapidly approaching profitability suggest any downturn will be small and short-lived and lead to a solid buying opportunity. 

As scary as the threat of recession is, we are not in one yet. The FOMC is set to start cutting rates soon, and small caps are expected to shine because of it. Technically, Freshpet is not a small cap, but its capitalization is as small as a company can be without qualifying. It is perfectly positioned to benefit from falling rates and reinvigorated consumer spending. 

Freshpet Sparks Fresh Interest as Leverage Grows

Freshpet has worked hard over the last two years to optimize its operations, expand production capability, and ensure quality consumer products. The results of those efforts are seen in the solid Q2 report and guidance for the year. They include top-line and bottom-line outperformance and improved leverage, which suggests that profitability is close at hand. 

Revenue was $235.23 million, up 28.4% from last year and 180 basis points better than the consensus reported by MarketBeat. Revenue gains were driven entirely by the 28.4% increase in volume, which aided the leverage of fixed costs. Input costs and the cost of quality control are also falling, leaving the gross margin up by 760 basis points or 610 on an adjusted basis. 

SG&A expenses grew but at a slower pace than revenue, aiding the bottom-line performance. SG&A as a percentage of revenue fell by 80 bps GAAP or 390 adjusted to leave the losses at only $1.7 million. That’s down from last year’s $17 million and may be overcome in the current or subsequent quarters. Guidance is also favorable, raised at the top and bottom line with the revenue target above consensus and CapEx below. 

To answer the question, is Freshpet capitalized and able to cross into profitability? The answer is yes. The company reported a slight decline in cash and current assets, but the balance sheet is flush with $251 million. Other balance sheet highlights include flat debt and liability, a 4.5% increase in shareholder equity, and low leverage, near 1.56x equity. 

Freshpet Analysts Lead the Stock to Higher Price Points

The analysts have not been quick to issue revisions based on the Q2 results but are unlikely to make significant changes other than to increase their revenue, earnings, and stock price targets. Until then, the trend leading into the report was bullish, including numerous price target upgrades, several boosted ratings, and initiated coverages. The takeaway is that the number of analysts covering this stock is growing, the community rates it as a Moderate Buy verging on Buy, and the consensus target assumes a 15% stock price upside from the post-release price points. 

The technical action in Freshpet is promising. The market opened with a significant gap lower but at the critical 150-day EMA, where buying was triggered. The market is still down on a day-to-day basis but shows support at the critical level that could keep the market from falling any further. While no significant rally is expected while the broad market is correcting, Freshpet may sustain its current trading range until the correction is over. Then, it will be free to continue trending higher, as it has done for the last nine months.