This high-end pet food maker is seeing institutions stocking up on its shares. In the last quarter, the company’s sales increased 12.5% and net income rose 24.3%. Both Motley Fool and Jim Cramer recently said it was on their ‘Buy’ lists.
Blue Buffalo Pet Products (BUFF)
From The Wealth Advisory
Founded in 2002 by the family of a dog named Blue who had dietary restrictions, Blue Buffalo Pet Products (BUFF) offers set out to make pet foods using only the highest quality natural ingredients and that’s exactly what it’s accomplished.
Consumers have responded in astonishing numbers, sending Blue Buffalo revenues soaring an average of 25.7% per year over the past three years and elevating the stock price by over 40% in 2016 alone.
The company released blockbuster earnings this past March and shares rebounded over 65% from lows in February. Still, even with these massive earnings beat, and a huge jump in stock price, there were some who were hesitant to believe the growth was sustainable, so, we’re going to be able to get in on this one at a price even lower than any of the insiders and institutions that were involved in the initial public offering (IPO).
Blue Buffalo reported first quarter earnings May 11 and made analysts and short-sellers look foolish once again by beating across the board. Earnings were higher than expected, revenues were up over 10%, and full year guidance was raised.
There are still a bunch of non-believers out there; the short ratio (the number of days at average trading volumes needed to cover all short positions) is around 16. But as the company continues to execute well, the share price will drift higher, and more short-sellers will have to cover their positions. This will drive the price even higher as they try to cut losses as quickly as possible.
Now don’t get me wrong, while I’m positive this is a great company, I’m not blinded into believing everything is sunshine and rainbows.
Last year, Blue Buffalo settled a class action lawsuit by Nestle (owner of Purina Pet Chow), by agreeing to pay out over $30 million to consumers who purchased its products over the past seven years. The basis of the suit was that BUFF claimed that no by-product meal made its way into its pet food, but that Nestlé’s scientists had discovered just that when testing Blue Buffalo products.
After an internal investigation, the company singled out one supplier (who sells to numerous pet food manufacturers) that was mislabeling products and selling by-product meal to natural food companies under pretenses that the meal contained no by-products and only whole foods.
The stock has recovered from the shock of these allegations and the ensuing settlement. The company has reaffirmed its commitment to use only the best ingredients and hold its suppliers accountable.
The stock is not cheap; it’s trading at a P/E well above the industry (53 compared to 40). The company also just announced a secondary issue of 25 million shares that caused the price to drop. But this isn’t a situation where shareholder value is being diluted. The shares are being sold by current shareholders.
We like buying shares after a secondary offering is announced. A stock will almost always be weak right after a secondary is announced, but the price tends to recover quickly.
I’m convinced this is one of the most solid long-term investments in the market right now. People will continue to spend on their pets. And Blue Buffalo will grow its top and bottom lines. And don’t rule out a bigger company snapping BUFF up—it is exactly the kind of company and product that bigger rivals will covet.
We expect to see serious continued growth for some time—hence my $38 price target (a healthy 43% increase).
The stock is down a bit right now while the secondary share offering is in the works, and we say this is an ideal “buy on weakness” situation. Over the long term, this is a company that stands to make smart investors incredibly happy (and their pets incredibly healthy).
Blue Buffalo common stock is a buy under $26.50. Our one-year price target is $38.
Briton Ryle, The Wealth Advisory, www.angelpub.com, 877-303- 4529, May 2016