Don’t Let This Dog into Your Portfolio

By Linda McDonough

Roadrunner readers know that we like to keep our nose to the ground on any developing news in the pet industry. Imagine how our tails wagged when we saw recently that Blue Buffalo Pet Products (Nasdaq: BUFF) had filed for an IPO. The stock offering is expected to price this week at a price between $16 and $18. Unfortunately, slowing sales growth, flat profits and a St. Bernard sized valuation will leave this stock in the dog house.

Blue Buffalo was founded on honorable principles.  Founder Bill Bishop and his two sons, Billy and Chris, were devastated in 2002 when their young Airedale, named Blue, was diagnosed with cancer at an early age.  Their mission was to develop high quality natural foods for pets to promote and sustain good health.

Bill Bishop, the father, had spent his career perfecting advertising and marketing for consumer product companies Unilever NV (NYSE: UN) and Procter and Gamble (NYSE: PG) before founding SoBe new age beverages in 1995. That company was later sold to PepsiCo (NYSE: PEP) in 2001, setting up a rich source of funding for the development of Blue Buffalo pet foods.

The good news is that Blue, the Bishop’s Airedale, is still chasing tennis balls and feeling healthy.  The bad news is that Blue Buffalo’s revenue, which grew revenue 37% in 2013 and 27% in 2014, put up only 10% growth in the first quarter of 2015.

Slowing growth is not necessarily a problem if profit growth accelerates or if a stock’s valuation is reasonable. Unfortunately neither of these commands is followed by the Blue Buffalo offering.  After growing profits 30% to $0.52 per share in 2014, Blue Buffalo saw earnings per share sag down a penny to $0.15 per share in the first quarter.

At the $17 midpoint of the suggested pricing range, Blue Buffalo will be trading at 37 times 2014 earnings. All of the 29 million shares offered are from selling shareholders which means that the company will not receive any of the proceeds from the deal for future growth spending.  Nevertheless, the selling shareholders are only selling 15% of their holdings and private equity firm Invus will hold a controlling 62% ownership stake after the IPO.

Unless Blue Buffalo starts behaving better with increasing growth rates, investors buying this IPO may leave with their tails between their legs.