Buffalo Pet Products Breaking Out with 50% Potential

BUFF stock
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Buffalo Pet Products Is Undervalued Given Growth

The pet foods market is massive, especially the demand for high quality products versus the standard cans and packages produced in China. A mid-cap pet foods stock that has above-average price appreciation potential and is worth a closer look is Blue Buffalo Pet Products Inc (NASDAQ: BUFF).

BUFF produces and sells high quality dog and cat foods produced with whole meats, fruits, vegetables, and other high quality ingredients. While the cost for these products is higher, there is a growing push towards wholesome pet foods that will provide the tailwinds for the longer-term vitality of Buffalo Pet Products.

As far as the scale of the pet food market, the American Pet Products Association reports the U.S. market at $66.75 billion in 2016 and rising to an estimated $69.36 billion in 2017. (Source: “Pet Industry Market Size & Ownership Statistics,” American Pet Products Association, last accessed August 21, 2017.)

BUFF stock has underperformed the S&P 500 with a 6.6% decline over the past 52 weeks, which I view as a good risk-to-reward buying opportunity for patient investors.

Underlying Fundamentals Support Bull Case for BUFF Stock

Buffalo Pet Products is all about delivering consistent results to Wall Street, but in my opinion, BUFF stock has not been fully appreciated by the stock market and is undervalued.

The revenue side has seen rising revenues in three consecutive years from $719.51 million in 2013 to $1.27 billion in 2017, representing a compound annual growth rate (CAGR) of 15.28% over the last four years.

Looking ahead, revenue growth is predicted to come in at 8.5% to $1.25 billion this year followed by 10.4% to $1.38 billion in 2018. (Source: “Blue Buffalo Pet Products, Inc. (BUFF),” Yahoo! Finance, last accessed August 21, 2017.)

Buffalo Pet Products is also profitable. After a 12% decline in 2015, the company managed to re-energize earnings by 46% in 2016 and is predicted to continue the higher earnings in 2017 and 2018.

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Technically, BUFF stock is stuck in a slightly downward-sloping sideways trading channel, with the stock trading between support at $21.00 and resistance at $27.00.

BUFF price chart

Chart courtesy of StockCharts.com

The daily chart displays a minor bullish double bottom at around $21.50, with the first bottom in late June and the second bottom in early August.

BUFF stock chart

Chart courtesy of StockCharts.com

In the weeks following the second bottom, BUFF stock staged a rally that vaulted the stock to above its 50-day moving average of $22.99 and 200-day moving average of $23.85.

Analyst Take:

Buffalo Pet Products stock appears to be holding on after the rally and could see an extension of the rally to above the $27.00 upper-band resistance. Should this happen, there is no reason not to believe that BUFF stock could make an initial move towards $30.00, followed by $35.00 for a potential move of close to 50%.