Blue Buffalo Added To JPMorgan 'Focus List' After Sell-Off

• Blue Buffalo Pet Products Inc BUFF shares have declined 34 percent year-to-date, and are trading close to the low-end of their 52-week range of $17.09 - $28.80.
• JP Morgan’s John Faucher maintained an Overweight rating for the company, while reducing the price target from $32 to $28.
• Faucher believes that the recent underperformance of Blue Buffalo’s shares offers an attractive investment opportunity, with the business remaining on track.

Following the recent decline, Blue Buffalo’s shares are trading at a discount to peers, even though the company’s fundamentals are robust. Analyst John Faucher believes that this offers an attractive opportunity to buy into a “high-quality, high-growth” company.

Faucher said that investors seem to be concerned about the launch of a competitor product, Natural Balance, into PetSmart, which is Blue Buffalo’s largest customer and accounts for about 47 percent of its sales. He added, however, that Blue Buffalo’s guidance already seems to have taken this into account and the company appears to be on track to at least meeting its guidance.

While the recent pullback in Blue Buffalo’s shares was not surprising, the extent of the decline was unexpected, with the shares having lost 38.5 percent since August 10, as compared to a 7 percent decline in the S&P. Faucher mentioned that Blue Buffalo has, therefore, been added to the JPMorgan Analyst Focus List.

“BUFF's combination of low-double-digit sales growth and margin expansion should lead to 20% EPS CAGR over the next few years,” the analyst wrote.

Faucher expects Blue Buffalo’s gross margins to expand significantly from Q4 onwards, as the company's Heartland manufacturing facility ramps up close to full capacity. “This will provide more than enough money to invest in the international and vet expansions that will help to drive the topline longer term,” the JP Morgan report added.