Blue Buffalo Pet Products, Inc. (NASDAQ: BUFF)

Gabelli research analyst Zamane Bodini discusses Blue Buffalo Pet Products, Inc.

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Hi. My name is Zamane Bodini and I’m a consumer products analyst at Gabelli. We recently initiated coverage on Blue Buffalo.

Headquartered in Wilton, Connecticut, Blue Buffalo manufactures wholesome natural dog and cat food under the Blue Buffalo brand

The company has 199 million shares outstanding, trading at 27 dollars per share for an equity market cap of 5.4 billion dollars.

Blue Buffalo participates in an attractive market – there are 184 million cats and dogs in the US, with 68% ownership among households. In 2016, these households spent $28 billion on pet food, of which 18% was in wholesome natural. Wholesome natural is the fastest growing category within pet food, growing twice the rate of the overall industry, as pet parents are increasingly evaluating the ingredient quality of pet food. Blue Buffalo is the leader in wholesome natural with 33% market share

The company’s high growth trajectory is expected to continue as it expands into underpenetrated channels of distribution and geographies. Currently 96% of sales are concentrated in US and all in specialty retail or online. This month Blue Buffalo is launching into 4 Food-Drug-Mass retailers within the US, which account for 8-9% of US pet industry sales. We believe this channel expansion could add an incremental $120 million in revenue by 2018.

Further upside is expected if the company expands into additional FDM retail door as the entire FDM channel represents 53% of industry sales dollars and 70% of volume, a $15 billion opportunity; or expands internationally as pet food sales generated outside the US are $50 billion.

Given Blue Buffalo’s ample white space opportunity, differentiated brands, industry leading growth algorithm, and high margin profile, we believe the company is an attractive takeout candidate and investment. We calculate a 2018 Private Market Value estimate of 33 dollars per share.

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