Home Comments Pomona Wealth Xmas Investment Ideas: Accenture & Freshpet

Pomona Wealth Xmas Investment Ideas: Accenture & Freshpet


By Rebecca Ellis
TUE, DEC 24 2019-theG&BJournal- With Christmas just around the corner, we have spotted some stock filler ideas which could give your portfolio a different twist in 2020.

Accenture – Investment Risk: Low

“A consultant is a person you pay to borrow your watch and tell you what time it is,” goes one of many (many) consulting jokes. Accenture has proven there is deep value in what it does. It boasts 91 of the Fortune Global 100 (and more than three-quarters of the Fortune Global 500) as clients. Perhaps more remarkable, 98 of its top 100 clients have been on board 10 years or more. That speaks to extraordinarily sticky relationships — both because of the value Accenture delivers and because the integration of its solutions into customers’ businesses makes switching costs very high.

Accenture’s business has traditionally been made up of three major roles: systems integration, typically implementing business software; management consulting, improving clients’ processes and strategies; and outsourcing, performing back-office functions, often in lower-cost locations. Consulting itself is also evolving, and Accenture is increasingly becoming more hands-on — and more creative — in how it helps its clients achieve success. That has driven a remarkable performance over the past several years, one that we think will continue to reward shareholders. Accenture’s sheer scale — the world’s largest consulting company by revenue — is a competitive advantage that it is already leveraging to drive growth and profits and fuel a nice dividend of 1.6%.

It is no mystery why Accenture is generating ever more cash. Increased IT spending and greater outsourcing are not just short-lived business trends. They are generational shifts that require companies to regularly revisit how they do business, weigh alternatives against new technologies, and shift accordingly. Movements toward artificial intelligence, the Internet of Things, and cloud computing will only accelerate that need.

In fact, the company formalized its focus on cloud computing, data security, and digital services back in fiscal 2016, dubbing these areas as “The New.” In fiscal 2014, Accenture said digital services (things like analytics and automation) accounted for around USD  5 billion in revenue. That was about 17% of total revenue. By the end of fiscal 2019, “The New” had grown to USD 28 billion, or 65% of the overall business. That is an extraordinary transformation in a very short period.

Fueled by an aggressive buying spree of advertising and marketing companies, Interactive is the company’s play on serving marketing needs in the digital age. Programmatic advertising — where campaigns are tailored on the fly for specific users — has become the kind of high-tech endeavor that demands deep expertise. Accenture is providing everything from the technology consulting to the creative input, a shot across the bow of advertising agencies. Its high profile and focus on cost efficiency gets it a seat at the table even in an industry that has not traditionally been part of its bailiwick.

Revenue from “The New” grew around 20% in local currencies last year. Interactive has been growing at nearly 30% over the past two years. Acquisition is certainly one factor, but this is a much faster-growing area of a large business that has traditionally been priced for slow growth. And while the rest of the business is slower-moving, it is growing. Every single one of the company’s five segments has grown over the past year and past five years.

Acquisition is a major part of Accenture’s plan: in the past five years, the company has spent roughly USD 5.8 billion in cash on well over 130 acquisitions. Nevertheless, Accenture boasts a fairly low-risk profile overall, and its bookings — USD 45.5 billion in fiscal 2019 — give us good visibility into strong performance ahead. And it carries no debt.

Building a modern enterprise is like building a modern aircraft — it takes thousands of parts from hundreds of suppliers. Finding the best way of fitting it all together has become the job of consultants, and it’s a job that is growing more important and complex as the digital age advances. Accenture is helping loyal clients spread further out into new areas, from AI to cloud computing to digital marketing. That is made for steady, predictable cash generation that is gaining momentum.

This is an investment we think you can stick with and worry very little about — a great way to start the new decade.

Freshpet – Investment Risk: Aggressive

Owning a dog or a cat is a big deal these days. We have always loved our pets, but we have never gone so far out of our way to treat them like members of the family. More owners are taking their pets into retail establishments. More “pet-friendly” hotels keep popping up to accommodate folks travelling with their furry friends. Is it any wonder that at a time when more of us are watching what we eat, we are doing the same for our pets? The American Pet Products Association estimates a record USD 75.4 billion will be spent on pets this year, and the largest chunk of that amount is the USD 31.7 billion we will spend to keep them happily fed.

Freshpet is a leading distributor of refrigerated all-natural pet food, cooking up meats, veggies, fruits, and other natural ingredients in small batches at low temperatures that are immediately refrigerated. It sells its dog and cat food and treats in branded refrigerators at a growing network of retail locations: 20,779 through the end of September.

Freshpet initially began selling its chilled eats at pet-supply stores and is now also moving into leading supermarket chains, convenience stores, and mass-market retailers. Getting this shelf space is not just good for branding — it is also a competitive advantage. No supermarket wants to stock pet products in the same coolers as food geared toward humans, and it will not be easy for a rival to convince any retailer outside of a pet-supply superstore to dedicate an end-cap space for a second branded pet-food fridge. Even then, how long will it take for a competitor to match Freshpet’s scale? Therefore, the fridges matter — they are part of Freshpet’s moat.

So is the food itself. When you change your pet’s diet — particularly when you go from dry to fresh — it can take a few days for them to adjust, and you are not going to want to switch brands once you find one you (and they) like. Unlike other fresh edibles that can only be secured at pet stores or through online merchants, there is comfort in knowing that you have one of the more than 20,000 Freshpet refrigerators chilling away at your favourite grocery store, warehouse club, or even discount department store — Target and Walmart are both on board.

It is not a surprising momentum is rocking in Freshpet’s favour. Freshpet’s revenue growth is accelerating for the third consecutive year, with the year-over-year percentage increase more than doubling in that time. Freshpet grew its top line by 11.6% in 2016, improving on that rate with a 17.5% uptick in 2017 and a 26.8% surge last year. Net sales have risen 27.2% through the first nine months of 2019, including a 28.5% pop in its latest quarter. The company is calling for at least 26.2% growth for the full year, but that’s the low end, and it could be sandbagging guidance in order to beat it.

The news is not as kind on the bottom line, but Freshpet’s net loss has narrowed through the first nine months of 2019. It has also turned a profit in two of the past four quarters, and positive full-year net income could arrive as early as 2020. Freshpet’s guidance calls for net sales to rise by at least 26% for all of 2019, with adjusted EBITDA climbing at least 43%.

Gaining ground with pet lovers has never been a problem for Freshpet. It has rattled off at least seven straight years of double-digit growth on the top line. Freshpet credits its latest growth spurt to a combination of velocity, innovation, and distribution gains.

Velocity is a matter of selling more products through its existing outlets, and Freshpet is excelling on that front. It’s household penetration rate has increased by 21% over the past year, but it’s still at roughly 3% of all homes. Freshpet’s booming popularity has led the company to upgrade some of its refrigerators to larger coolers, in some cases adding a second fridge.

Distribution gains will continue, with Freshpet targeting 1,500 to 1,600 new refrigerators for all of 2019. It is also early in establishing a presence in the U.K. and Canada — much smaller markets than its home turf, but territories with plenty of upside.

Innovation will come from new bagged and rolled products, as well as from new outlets. Freshpet has seen sales explode through home delivery services including Instacart and Shipt, as well as fresh e-commerce via Amazon Prime Now and FreshDirect. That category has nearly doubled over the past year, but it still represents just 2.5% of its sales.

If you own a cat or dog, there’s a good chance you looked up from this recommendation and thought about their diet. And if you are not a pet owner — well, the numbers don’t lie. We spend a lot to keep the animals we love healthy and happy. Freshpet is riding a hot trend that is only going to get hotter, and I think buying shares today will put a little wag in your portfolio.

Rebecca Ellis is a Personal investment advisor, based in Zurich|rebecca.ellis@pomonawealth.com|pascal.crepin@pomonawealth.com.

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