Intrinsic value of Blue Buffalo Pet Products - BUFF

Previous Close

$28.28

  Intrinsic Value

$6.68

stock screener

  Rating & Target

str. sell

-76%

Previous close

$28.28

 
Intrinsic value

$6.68

 
Up/down potential

-76%

 
Rating

str. sell

We calculate the intrinsic value of BUFF stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 5.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  11.98
  2.80
  3.02
  3.22
  3.40
  3.56
  3.70
  3.83
  3.95
  4.05
  4.15
  4.23
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.82
  4.84
  4.86
  4.87
  4.88
  4.90
Revenue, $m
  1,150
  1,182
  1,218
  1,257
  1,300
  1,346
  1,396
  1,449
  1,507
  1,568
  1,633
  1,702
  1,775
  1,853
  1,935
  2,022
  2,114
  2,211
  2,314
  2,422
  2,535
  2,655
  2,782
  2,915
  3,055
  3,202
  3,357
  3,520
  3,692
  3,872
  4,062
Variable operating expenses, $m
 
  596
  614
  634
  655
  678
  703
  730
  759
  790
  823
  858
  895
  934
  975
  1,019
  1,065
  1,114
  1,166
  1,220
  1,278
  1,338
  1,402
  1,469
  1,540
  1,614
  1,692
  1,774
  1,861
  1,952
  2,047
Fixed operating expenses, $m
 
  367
  376
  386
  395
  405
  415
  426
  436
  447
  458
  470
  481
  494
  506
  518
  531
  545
  558
  572
  587
  601
  616
  632
  648
  664
  680
  697
  715
  733
  751
Total operating expenses, $m
  929
  963
  990
  1,020
  1,050
  1,083
  1,118
  1,156
  1,195
  1,237
  1,281
  1,328
  1,376
  1,428
  1,481
  1,537
  1,596
  1,659
  1,724
  1,792
  1,865
  1,939
  2,018
  2,101
  2,188
  2,278
  2,372
  2,471
  2,576
  2,685
  2,798
Operating income, $m
  221
  219
  228
  238
  250
  263
  277
  293
  311
  330
  351
  374
  399
  425
  454
  484
  517
  552
  589
  629
  671
  716
  763
  814
  868
  925
  985
  1,049
  1,116
  1,188
  1,264
EBITDA, $m
  230
  229
  237
  248
  260
  273
  288
  305
  323
  343
  364
  388
  413
  440
  469
  500
  534
  569
  607
  648
  691
  736
  785
  837
  892
  950
  1,011
  1,076
  1,145
  1,218
  1,295
Interest expense (income), $m
  0
  13
  7
  8
  8
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
  16
  17
  18
  19
  21
  22
  23
  24
  26
  27
  29
  30
  32
  34
Earnings before tax, $m
  207
  206
  221
  230
  241
  254
  268
  284
  301
  320
  340
  363
  387
  412
  440
  470
  502
  536
  572
  610
  652
  695
  742
  791
  843
  899
  958
  1,020
  1,086
  1,156
  1,230
Tax expense, $m
  77
  56
  60
  62
  65
  69
  72
  77
  81
  86
  92
  98
  104
  111
  119
  127
  135
  145
  154
  165
  176
  188
  200
  214
  228
  243
  259
  275
  293
  312
  332
Net income, $m
  130
  150
  161
  168
  176
  185
  196
  207
  220
  234
  248
  265
  282
  301
  321
  343
  366
  391
  417
  446
  476
  508
  541
  577
  616
  656
  699
  745
  793
  844
  898

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  293
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  650
  367
  378
  390
  404
  418
  433
  450
  468
  487
  507
  528
  551
  575
  601
  628
  656
  686
  718
  752
  787
  824
  864
  905
  948
  994
  1,042
  1,093
  1,146
  1,202
  1,261
Adjusted assets (=assets-cash), $m
  357
  367
  378
  390
  404
  418
  433
  450
  468
  487
  507
  528
  551
  575
  601
  628
  656
  686
  718
  752
  787
  824
  864
  905
  948
  994
  1,042
  1,093
  1,146
  1,202
  1,261
Revenue / Adjusted assets
  3.221
  3.221
  3.222
  3.223
  3.218
  3.220
  3.224
  3.220
  3.220
  3.220
  3.221
  3.223
  3.221
  3.223
  3.220
  3.220
  3.223
  3.223
  3.223
  3.221
  3.221
  3.222
  3.220
  3.221
  3.223
  3.221
  3.222
  3.220
  3.222
  3.221
  3.221
Average production assets, $m
  139
  142
  146
  151
  156
  162
  167
  174
  181
  188
  196
  204
  213
  222
  232
  243
  254
  265
  278
  291
  304
  319
  334
  350
  367
  384
  403
  422
  443
  465
  487
Working capital, $m
  386
  99
  102
  106
  109
  113
  117
  122
  127
  132
  137
  143
  149
  156
  163
  170
  178
  186
  194
  203
  213
  223
  234
  245
  257
  269
  282
  296
  310
  325
  341
Total debt, $m
  383
  209
  219
  230
  242
  255
  269
  284
  300
  317
  335
  354
  375
  397
  420
  444
  470
  497
  525
  556
  587
  621
  656
  693
  733
  774
  817
  863
  911
  961
  1,014
Total liabilities, $m
  504
  330
  340
  351
  363
  376
  390
  405
  421
  438
  456
  475
  496
  518
  541
  565
  591
  618
  646
  677
  708
  742
  777
  814
  854
  895
  938
  984
  1,032
  1,082
  1,135
Total equity, $m
  146
  37
  38
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  58
  60
  63
  66
  69
  72
  75
  79
  82
  86
  90
  95
  99
  104
  109
  115
  120
  126
Total liabilities and equity, $m
  650
  367
  378
  390
  403
  418
  433
  450
  468
  487
  507
  528
  551
  576
  601
  628
  657
  687
  718
  752
  787
  824
  863
  904
  949
  994
  1,042
  1,093
  1,147
  1,202
  1,261
Debt-to-equity ratio
  2.623
  5.700
  5.800
  5.900
  6.000
  6.100
  6.210
  6.310
  6.410
  6.510
  6.610
  6.710
  6.800
  6.900
  6.990
  7.070
  7.160
  7.240
  7.320
  7.390
  7.460
  7.530
  7.600
  7.660
  7.720
  7.780
  7.840
  7.890
  7.940
  7.990
  8.040
Adjusted equity ratio
  -0.412
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  130
  150
  161
  168
  176
  185
  196
  207
  220
  234
  248
  265
  282
  301
  321
  343
  366
  391
  417
  446
  476
  508
  541
  577
  616
  656
  699
  745
  793
  844
  898
Depreciation, amort., depletion, $m
  9
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  32
Funds from operations, $m
  130
  160
  171
  178
  186
  196
  207
  219
  232
  246
  261
  278
  296
  315
  336
  359
  383
  408
  435
  464
  495
  528
  563
  600
  640
  681
  725
  772
  822
  874
  930
Change in working capital, $m
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
Cash from operations, $m
  127
  157
  168
  175
  183
  192
  203
  214
  227
  241
  256
  272
  290
  309
  329
  351
  375
  400
  427
  455
  486
  518
  553
  589
  628
  669
  712
  759
  807
  859
  914
Maintenance CAPEX, $m
  0
  -9
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
  -30
New CAPEX, $m
  -56
  -3
  -4
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
Cash from investing activities, $m
  -57
  -12
  -13
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -33
  -34
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -51
  -53
Free cash flow, $m
  70
  145
  154
  160
  168
  176
  186
  197
  209
  222
  236
  251
  268
  286
  305
  326
  348
  372
  397
  424
  453
  484
  517
  551
  588
  627
  669
  713
  759
  809
  861
Issuance/(repayment) of debt, $m
  -4
  -170
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  24
  26
  27
  29
  30
  32
  34
  35
  37
  39
  41
  43
  46
  48
  50
  53
Issuance/(repurchase) of shares, $m
  2
  29
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -2
  -141
  10
  11
  12
  13
  14
  15
  16
  17
  18
  19
  20
  22
  23
  24
  26
  27
  29
  30
  32
  34
  35
  37
  39
  41
  43
  46
  48
  50
  53
Total cash flow (excl. dividends), $m
  68
  4
  164
  171
  180
  189
  200
  212
  225
  239
  254
  270
  288
  307
  328
  350
  374
  399
  426
  455
  485
  518
  552
  589
  627
  669
  712
  758
  807
  859
  914
Retained Cash Flow (-), $m
  -137
  -180
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
Prev. year cash balance distribution, $m
 
  289
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  113
  163
  170
  179
  188
  198
  210
  223
  237
  252
  268
  286
  305
  326
  347
  371
  396
  423
  451
  482
  514
  548
  584
  623
  664
  707
  753
  802
  853
  908
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  109
  149
  148
  147
  146
  144
  142
  139
  136
  132
  127
  122
  116
  109
  102
  94
  86
  78
  69
  61
  53
  45
  38
  32
  26
  21
  16
  12
  9
  7
Current shareholders' claim on cash, %
  100
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

Blue Buffalo Pet Products, Inc. (BBPP) is a holding company. The Company operates as a pet food company. The Company, through its subsidiaries, develops, produces, markets and sells pet food under product lines, including BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom and BLUE Natural Veterinary Diet lines. Its product lines of pet food include various product types for dogs and cats. The Company categorizes its products as dry foods, and wet foods, treats and other products. It has a product portfolio across various product types, including diet types, breed sizes for dogs, life stages, flavors, product functions, and textures and cuts for wet foods. BLUE Wilderness is a high-meat, high-protein and grain-free ancestral feeding line. BLUE Basics is a line of limited ingredient diet products for pets with food sensitivities. BLUE Freedom is a grain-free line. BLUE Natural Veterinary Diet is a line of Therapeutic diets for pets, offered through veterinarians.

FINANCIAL RATIOS  of  Blue Buffalo Pet Products (BUFF)

Valuation Ratios
P/E Ratio 42.8
Price to Sales 4.8
Price to Book 38.1
Price to Tangible Book
Price to Cash Flow 43.8
Price to Free Cash Flow 78.3
Growth Rates
Sales Growth Rate 12%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 460%
Cap. Spend. - 3 Yr. Gr. Rate -2.6%
Financial Strength
Quick Ratio 73
Current Ratio 0
LT Debt to Equity 259.6%
Total Debt to Equity 262.3%
Interest Coverage 0
Management Effectiveness
Return On Assets 22.4%
Ret/ On Assets - 3 Yr. Avg. 24.6%
Return On Total Capital 28.1%
Ret/ On T. Cap. - 3 Yr. Avg. 31.2%
Return On Equity 167.7%
Return On Equity - 3 Yr. Avg. -44.6%
Asset Turnover 2
Profitability Ratios
Gross Margin 44.9%
Gross Margin - 3 Yr. Avg. 41.9%
EBITDA Margin 18.8%
EBITDA Margin - 3 Yr. Avg. 17.4%
Operating Margin 19.2%
Oper. Margin - 3 Yr. Avg. 18.1%
Pre-Tax Margin 18%
Pre-Tax Margin - 3 Yr. Avg. 16.7%
Net Profit Margin 11.3%
Net Profit Margin - 3 Yr. Avg. 10.4%
Effective Tax Rate 37.2%
Eff/ Tax Rate - 3 Yr. Avg. 38%
Payout Ratio 0%

BUFF stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the BUFF stock intrinsic value calculation we used $1150 million for the last fiscal year's total revenue generated by Blue Buffalo Pet Products. The default revenue input number comes from 2016 income statement of Blue Buffalo Pet Products. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our BUFF stock valuation model: a) initial revenue growth rate of 2.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for BUFF is calculated based on our internal credit rating of Blue Buffalo Pet Products, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Blue Buffalo Pet Products.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of BUFF stock the variable cost ratio is equal to 50.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $358 million in the base year in the intrinsic value calculation for BUFF stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Blue Buffalo Pet Products.

Corporate tax rate of 27% is the nominal tax rate for Blue Buffalo Pet Products. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the BUFF stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for BUFF are equal to 12%.

Life of production assets of 15.4 years is the average useful life of capital assets used in Blue Buffalo Pet Products operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for BUFF is equal to 8.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $146 million for Blue Buffalo Pet Products - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 196.959 million for Blue Buffalo Pet Products is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Blue Buffalo Pet Products at the current share price and the inputted number of shares is $5.6 billion.

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▶ Today's Bell Ringer, May 17, 2017   [May-17-17 09:16AM  CNBC Videos]
▶ Blue Buffalo beats Street 1Q forecasts   [May-09-17 06:04PM  Associated Press]
▶ IIROC Trading Resumption - BUFF.P; DVC.H; HVST   [Apr-27-17 04:23PM  CNW Group]
▶ IIROC Trading Halt - BUFF.P   [01:06PM  PR Newswire]
▶ Blue Buffalo meets 4Q profit forecasts   [04:49PM  Associated Press]
Financial statements of BUFF
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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