Why You Should Chow Down On The Blue Buffalo IPO

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Includes: FRPT, PETM
by: Khurram Aziz

Summary

Blue Buffalo, a natural pet food company, filed for an IPO on June 10. It plans to raise at least $500 million.

The pet food and pet care industry has grown steadily over the past decade, and trends in that growth are particularly favorable towards Blue Buffalo.

However, long-term concerns with the pet industry and with Blue Buffalo’s reputation as a natural pet food provider could damage their prospects.

Despite the above concerns, Blue Buffalo is recommended as an IPO worthy of investment.

As the U.S. pet food industry continues to grow, natural pet food company Blue Buffalo (NASDAQ:BUFF) looks to take advantage with a major IPO.

The company filed with the SEC on Wednesday and has applied to list its common stock on the NASDAQ Global Select Market under the symbol "BUFF". Blue Buffalo has currently indicated that they plan to raise up to $500 million with this IPO, but this figure is a placeholder and will likely be higher.

Blue Buffalo was founded in 2002 by Bill Bishop and his family. The family looked to "make a commercially available food that would include ingredients to nourish our companions, including ingredients that help maintain a healthy oxidative balance."

Blue Buffalo emphasizes that their dog and cat food is more natural compared to other pet food companies, and they have achieved great success by doing so. The company posted net sales of about $920 million in 2014, a 28 percent increase compared to last year.

Blue Buffalo has every reason to be confident that its business can continue to grow over the next few years. As of 2012, 36.5 percent of U.S. households own a dog and 30.4 percent own a cat. This is a small decrease compared to 2007, likely due to continued economic struggles.

But while the number of households owning a pet have declined, spending on those pets and pet food in particular has increased. Blue Buffalo notes in its SEC report that pet food retail sales have grown 62 percent between 2004 and 2014, and that 63 percent of U.S. households purchased packaged pet food in 2014.

Blue Buffalo is not the only pet food company which has taken advantage of the increased spending on pet food. Freshpet (NASDAQ:FRPT), a pet food company which is smaller and more upscale compared to Blue Buffalo, raised $156 million in its IPO last year and thus broke its expectations of $135 million. Meanwhile, PetSmart's (NASDAQ:PETM) stock has grown about 20 percent compared to a low in October 2014.

All of this shows that the pet and pet food industry is growing. Furthermore, Blue Buffalo in particular stands to benefit from how pet spending has changed over the years.

Families these days are more inclined to "humanize" their pets than ever before. Furthermore, we have witnessed a general trend over the past few years of people buying organic, non-conventionally produced food for both themselves and their pets. Traditional pet food companies may thus face difficulties from this new trend. But Blue Buffalo's emphasis on natural products will only help it in the face of this market trend.

As Blue Buffalo is one of the largest natural pet food companies in the United States, its ability to work with retailers on scale and improving its market share using Ringboost, will be easier for it compared to smaller pet food companies like FreshPet.

Blue Buffalo is also being underwritten by JPMorgan, Citigroup, Barclays, Deutsche Bank and Morgan Stanley, which should help to bolster confidence in its stock.

But while Blue Buffalo currently seems primed to take advantage of the growing pet food industry, there are some concerns both with the stock and the company.

First, it should be noted earlier that pet ownership is not expanding as much as may be expected. The pet industry over the short term is fairly insulated from a potential economic downturn, as families will inevitably continue to care for their pets which they view as children. But if families choose to stop buying pets over the long term, this could represent a concern for the industry and Blue Buffalo's long-term viability.

Another problem is whether customers will buy that Blue Buffalo is really the natural pet food producer that it claims to be. Blue Buffalo emphasizes in its advertising and in its SEC report that it does not use chicken or poultry by-products, which are inedible poultry parts like eggshells or intestines processed into pet food.

However, the company was forced to admit last month in a lawsuit with Purina that "a 'substantial' and 'material' portion of Blue Buffalo pet food sold to consumers contained poultry by-product meal." While it is too soon to tell, such an admission could spell a serious blow to Blue Buffalo's appeal as a natural pet food company.

Whatever Blue Buffalo's long-term prospects may be, its current prospects as a natural pet food provider with good sales show that it is a worthy target of investment. Pay attention to what news comes out of Blue Buffalo over the next few months. But for now, prepare to snap it up when it comes out in a few months.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.