Is This Pet-Friendly Stock a Good Investment?

By Markets Fool.com

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Image source: Getty Images.

Last week, Blue Buffalo Pet Products, Inc. (NASDAQ: BUFF), a pure-play pet food manufacturer, offered up guidance for the remainder of 2016 that includes sales of at least $1.14 billion, up from $1.03 billion in 2015. Does this outlook suggest Blue Buffalo has what it takes to be an investor's best friend?

Tasty financials

Americans have welcomed 70 million dogs into their families and they're spending big money every year feeding them.According to the American Pet Products Association, consumers spent a whopping $23 billion on pet food last year.

Increasingly, consumers are shifting their pet food spending from mass-market brands to brands marketing themselves as higher-quality alternatives. Blue Buffalo, which makes its pet food with whole meats, fruits, and vegetables, is one of the most successful of these high-quality brands. It's the No. 1 brand in the wholesome natural pet food market and it has approximately 6% share of the overall pet food industry.

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Blue Buffalo's products are sold inthe United States, Canada, Japan, and Mexico, but the U.S. accounts for the majority of its $287 million in second-quarter sales. Leveraging year-over-year sales growth of 12.9% against fixed costs helped the company to deliver $0.19 in earnings per share last quarter, up45% from a year ago.

Gross profit increased$27.5 million,or 27.6%, to$127.3 millionand gross margin jumped 5.1% year over year to 44.4% in the quarter. Management citessupply chain efficiencies, lower input costs, favorable mix, and higher net pricing as the reasons for its margin improvement. In terms of mix,sales of higher-margin wet food products and treats are growing more quickly than dry foods.Dry foodssales increased$22.0 million, or 10.6%, to$228.8 millionwhile wet foods, treats, and other product sales increased$10.9 million, or 23%, to$58.1 million.

Thanks to more money falling to the bottom line,Blue Buffalo's sitting on $273.6 million in cash on its balance sheet exiting June, up from $224.3 million in December.

Image source: Blue Buffalo Pet Products.

Looking ahead

Management's guiding for total sales of between$1.14 billion-$1.15 billion and adjusted earnings per share of between $0.74-$0.76 this year. If it can deliver on that outlook, then it would represent 11% top-line and 19% bottom-line growth versus 2015.

That's pretty solid growth for a consumer goods company, yet Blue Buffalo announced this week that its biggest shareholder is going to reduce its stake in it. Invus, a New York Investment firm, is reducing its ownership of Blue Buffalo to44.5% from 50.9%, according to a filing with the Securities and Exchange Commission.

While Invus' decision to lighten up its exposure to the company couldindicate it thinks Blue Buffalo's best days are behind it, investors might not want to draw too many conclusions. Invus has been Blue Buffalo's principal backer since 2006 and, therefore, it shouldn't be faulted too much for wanting to book some of its gains.

Overall,Blue Buffalo has a history of delivering revenue and earnings growth, and since the company's share of this multibillion-dollar market remains tiny, it seems to me that there's reason to think sales and profit can continue to reward shareholders. If so, then a growing population of well-fed pets globally could make Blue Buffalo an intriguing stock to stash away in portfolios.

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Todd Campbell has no position in any stocks mentioned.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.

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