Blue Buffalo: The Natural Pet Food's Second IPO Chance Is Likely Another Bust

Jul. 16, 2015 4:37 AM ETBlue Buffalo (BUFF-OLD)23 Comments

Summary

  • BUFF's IPO is set to be the biggest deal (and flop) in July.
  • BUFF has a PR problem, which will affect its revenue, cost to acquire new customers, and - most importantly - share price.
  • My model predicts BUFFs share price to fall from $17 to $8 by 2017, all things being equal.

If you're a pet owner, you might have come across Blue Buffalo's (Pending:NASDAQ:BUFF-OLD) natural pet food while shopping for your little buddy's dinner. Indeed, pet owners are paying more attention to what their pets eat - 55% percent of pet owners, according to a survey. This has fostered a growing market of high-quality pet food and snacks. With Blue Buffalo perhaps the most well-known "natural" pet food, investors will now be able to invest directly in this market. Blue Buffalo has applied for a NASDAQ listing under the ticker BUFF.

Freshpet (FRPT), a flop, preceded BUFF. Other companies will likely follow BUFF, but for now BUFF seems like the only decent exposure into a market that is growing and that caters to high-income individuals (e.g., baby boomers). BUFF alone has brought in $940.3 of revenue in the past year. And this was done with a rather simple business model: Indoctrinate pet owners about pet nutrition and sell them natural pet food. It's more-or-less the same model other "natural" companies attract human customers.

Of the upcoming IPOs for July, BUFF is the largest deal. Its IPO deal size is over $500 million, which would immediately place BUFF in the large-cap category. The price range for a share of BUFF when it hits the market is $16 to $18. But I'm here to convince you not to buy it!

Business Practices
As the owner of a small organic skincare business myself, I get frequent emails from potential buyers asking about the ingredients and manufacturing process of the product. The fact is that people who buy natural are more discerning of the actual product. And when you're marketing to a niche community in an already niche market, you can expect word to travel fast if your product isn't what you advertise it to be.

This article was written by

Damon Verial profile picture
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Damon Verial is a statistical analyst who uses his skills to research stocks, options, and investment strategies. In addition, Damon is the writer of Copy My Trades, a trade-alert, subscription-based newsletter, available at his personal website. He is also the writer of Exposing Earnings, an in-depth earnings prediction service here on Seeking Alpha.

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Damon makes his living as a gap trader, an earnings trader, and an interday trader. In his free time, he writes for Seeking Alpha, where he focuses on seasonal investing, market timing, and earnings analyses.

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Damon has written several successful stock analysis algorithms, including algorithms that can predict gap closure, intraday patterns, and news overreactions. They will soon be publically available for subscribers.

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Damon’s undergraduate education was in statistics and mathematics at the University of Washington; his graduate education was in psychology at National Taiwan University. He currently lives in Fukuoka, Japan.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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