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By Zain Akbari, CFA | 09-18-2017 12:00 AM

Pet-Food Trends Strengthen Blue Buffalo's Moat

The narrow-moat pet food leader has a good reputation, a premium-only lineup, and an attractive valuation.

We think Blue Buffalo is an attractive way for investors to benefit from trends favoring high-end pet food.

Pets have taken on the role of children in older and younger households alike. As a result, pet owners have sought premium pet foods that mirror trends in human categories, favoring natural, clean-label, and high-protein items. Blue Buffalo is the leader in wholesome, natural pet food, with about a one third market share in this category, which should continue to grow faster than the overall pet food market.

We assign Blue Buffalo a narrow moat based on the firm's brand-based competitive advantage. We also think Blue Buffalo's moat is strengthening, as its efforts in therapeutic food should help the full lineup gain favor with veterinarians, who are key purchase influencers.

Further, we think Blue Buffalo's focus on the premium segment of the pet food market should enable it to take better advantage of consumers' continued shift to e-commerce, as its higher-margin products can better cope with delivery costs.

Blue Buffalo competes with scaled, diversified consumer goods firms like J.M. Smucker, Colgate-Palmolive, and others, but we believe its reputation with pet owners, its premium-only lineup, and its still attractive valuation make it a top choice for investors looking to capitalize on the high-end pet food trend. Shares currently trade at about a 10% discount to our fair value estimate.

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