Morgan Stanley Upgrades Blue Buffalo, Names 'Top Pick'

• Shares of Blue Buffalo Pet Products, Inc. (NASDAQ: BUFF) have declined 31.14 percent over the past three months, touching a low of $17.11 on October 6.
• Morgan Stanley’s Dara Mohsenian has upgraded the company from Equal-weight to Overweight, while maintaining a price target of $24.
• While naming Blue Buffalo as Morgan Stanley’s Top Pick, Mohsenian said that the long-term growth potential of the company “is far from being priced” into the current stock valuation and that the stock could have 37 percent upside.

Analyst Dara Mohsenian sees the recent pullback in the stock as an “excellent” buying opportunity, while mentioning that investor concerns regarding increasing competition and other risks facing the company have been overdone.

Mohsenian also believes that the current Street expectations for long-term revenue growth would prove conservative given the favorable outlook for the pet food industry, which has grown at a CAGR Of 5 percent over the past decade, “and given BUFF's favorable 100 percent sub-category positioning in the high growth wholesome natural sub-category.”

According to the Morgan Stanley report, the market is underestimating the various topline growth opportunities facing Blue Buffalo, including its penetration of the US alternative e-speciality channels, especially e-commerce, higher penetration of the non-dry dog food market and international expansion, among others.

“These growth opportunities are on top of strong pet superstore growth, where BUFF has 73 percent of revenue mix,” Mohsenian stated.

“There are clearly some increasing risk factors that have pressured BUFF's stock… these risks increasingly appear to be priced into the stock, leaving a positive asymmetrical risk reward,” the report added.