Take a Ride on the Wild Side

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

How do you feel about wings, beer, and sports? If you enjoy watching a game with friends, you might think it sounds heavenly. Even if this type of environment doesn’t interest you, think about the appeal it has for millions of Americans.

High demand

Of course, you can find this combination in many places, but Buffalo Wild Wings (NASDAQ: BWLD) offers higher quality, a better presentation, and a superb atmosphere. In regards to the latter, you’re going to find at least 30 flat-screen televisions in each restaurant. And sporting events will always be on.

Buffalo Wild Wings has nailed its business model so that its restaurants are constantly packed. According to employees on Glassdoor.com, some employees feel as though management is unable to keep up with traffic and that the restaurants need to be redesigned to fit more people. The point is that demand is extremely high. While some employees think the company is growing too fast, it should be noted that CEO Sally J. Smith has received an 84% approval rating.

Something for everyone

While Buffalo Wild Wings is best known for attracting sports fans, management has been wise to target the local crowd. For instance, if a Buffalo Wild Wings is located in an area with more families than singles, then it will market that restaurant more to that crowd.

Buffalo Wild Wings offers more than just wings, including burgers, sandwiches, a kids menu, salads, and desserts. For those who are most interested in the wings, Buffalo Wild Wings offers 16 signature sauces and five seasonings. This is important, because it keeps a regular visitor’s experiences fresh. Offering 16 signature sauces and five different seasonings is a form of innovation in itself. The best part about this is that Buffalo Wild Wings can offer different types of meals while keeping costs low. 

Costs

Speaking of keeping costs low, Buffalo Wild Wings has enjoyed a decline in chicken prices. In the first quarter, chicken costs declined 7.9% year-over-year. Better yet, chicken costs are expected to continue to decline. This will lead to stronger margins, which then lead to bigger profits, and the likelihood of stock appreciation.

Of course, Buffalo Wild Wings must meet or beat expectations for a short-term spike, but “short-term” is the key phrase when it comes to quarterly expectations. If you’re looking at the longer term picture, then you shouldn’t care too much about quarterly results.

If you want to look at revenue and earnings trends, look at annual results. In this case, you will see that Buffalo Wild Wings has seen consistent revenue and earnings improvements. What really stands out is that revenue growth increased in 2012, which is extremely rare compared to other companies throughout the broader market -- not just in casual dining.

Buffalo Wild Wings will see some increased costs due to its expansion plans, however, adding more units should increase top-line growth. But based on the company’s performance, the expansion plans seem to make sense. At the moment, Buffalo Wild Wings would like to go from 891 units to 1,500 over the next five years. It would also like to grow internationally.

Buffalo Wild Wings vs. bigger players

Buffalo Wild Wings seems to have everything going for it. Growth is strong, profits are commonplace, margins are likely to improve, and even debt management has been excellent. If you’re really looking for a negative, then it could either be that the company doesn’t pay a dividend (actually a good decision based on limited cash on balance sheet) or that Buffalo Wild Wings is trading at 34 times earnings, which is expensive. 

If you’re looking for a cheaper and more diversified investment, then you might want to consider Yum! Brands (NYSE: YUM). Yum! Brands is well known for its Taco Bell, KFC, and Pizza Hut restaurants. It's now recovering from its KFC chicken quality debacle and the Avian flu impact on China. It's currently trading at 23 times earnings, and it yields 1.90%. Being widely diversified in regards to brands and geography, Yum! Brands should continue to grow.

McDonald’s (NYSE: MCD) recently missed expectations. More importantly, it warned of a slow second half as Europe and Asia-Pacific had a lot to do with the company’s subpar performance. Unfortunately, menu innovation hasn’t been enough to stave off increased competition. On the other hand, McDonald’s has always had a knack for finding ways to steal back market share. There’s no guarantee that the company can pull it off, but considering it owns one of the most recognizable brands in the world, advantage McDonald’s.

On an annual basis, McDonald’s has seen revenue improvements over the past three years, and earnings have been steady. If the stock gets hammered, then McDonald’s may attempt to stop the bleeding by returning more cash to shareholders.

McDonald’s currently yields 3.10%. Despite a recent downturn, McDonald’s should remain one of the most resilient stocks in the restaurant space.

Conclusion

If you’re looking for slow and steady growth, consider Yum! Brands. If you want resiliency and generous dividend payments, look at McDonald’s. And if you’re on the hunt for one of the fastest growing casual-dining restaurants in the world, then Buffalo Wild Wings should be on your radar.

Many analysts have recently stated that good news is already priced into the stock. If this concerns you, or if you’re concerned about the broader market in general, then you might want to buy a little now and save capital to add to your position on future dips. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and McDonald's. The Motley Fool owns shares of Buffalo Wild Wings and McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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