Investors Give Blue Buffalo a Vote of Confidence in IPO

Healthful food is all the rage for humans these days, so why not for pets, too? That's the driving philosophy behind this week's big IPO from Blue Buffalo Pet Products. The company specializes in wholesome comestibles for our animal friends.

Blue Buffalo began trading on the Nasdaq on Wednesday, and investors ate it up (sorry!) -- the stock closed up 36% on the day, to $27.20 per share.

But do the fundamentals justify such a pop? Let's open the can and take a look at the company to figure that out.

Wholesome profitsIn retrospect, it was inevitable that the growth of the organic/natural foods market would affect the pet segment. Blue Buffalo was founded on the principle that our four-legged family members should eat as healthily as we (ideally) do.

The firm, which offersnatural-ingredient-based products for dogs and cats, claims that it's "the fastest-growing major pet food company in the United States."

The top-line figures certainly bear this out: Net sales of around $5 million in 2005 expanded to nearly $918 million in 2014. That latter number, meanwhile, was 28% higher on a year-over-year basis.

Enticingly for a young company coming to the stock exchange, Blue Buffalo has been in the black for several years running. In 2010 it began to post a net profit, which briskly rose from $23 million that year to $102 million in 2014.

Marketing really helps. The company has spent a total of around $400 million on marketing and related activities since 2003. According to its prospectus, this makes it the top advertiser "in the Wholesome Natural market segment."

In the legal dog poundDogs and cats might happily chow on Blue Buffalo's products, but some humans have taken exception to the way the firm does business.

Last year a big rival, Nestle's Purina, sued it, alleging false advertising, disparagement, and unjust enrichment. According to Purina, this followed laboratory testing that indicated several Blue Buffalo foods contained "significant percentages" of poultry by-product meal.

This, despite the firm's emphatic assertions that their goods contain no such material.

In a recent press release regarding the allegations, Blue Buffalo said:

The company accuses its veteran rival of waging a "smear campaign" against it.

Waiting for a better mealWhether these allegations are true or not, the lawsuit threatens to erode the reputation of Blue Buffalo. That could irrevocably damage its sales -- after all, the firm's main selling point is the purity and wholesomeness of its ingredients.

That's why investors might be best advised not to buy stock of the company fresh out of the gate, particularly given the big first-day gain. Nestle's got very deep pockets and can fight this battle effectively, so it seems likely that Blue Buffalo will take more hits to its reputation. And, likely, to its share price.

The company is growing admirably, but not enough to match resources with the likes of its determined competitor.

Forbes reports that Blue Buffalo priced its shares at $20 on Tuesday, which was above the expected range of $16 to $18. The shares opened Wednesday morning at $27.

The article Investors Give Blue Buffalo a Vote of Confidence in IPO originally appeared on Fool.com.

Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.