Is This a Good Entry Point Into This Fast Growing Restaurant Chain?
Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are more than 850 Buffalo Wild Wings (NASDAQ: BWLD) locations across 48 states in the United States, as well as in Canada. Buffalo Wild Wings was founded in 1982, and the company has achieved tremendous growth since its IPO in 2003, with shares soaring more than sevenfold over these years. The company has posted 20%+ growth in terms of revenue as well as earnings over the past 5 years, and I look forward to its continued success in the future. Unfortunately, the shares have seen a 15% downfall over the last 3 months as the skyrocketing chicken prices continued to hurt the company’s bottom-line. However, I see this recent weakness as a good entry point to own this high-growth stock.
Buffalo Wild Wings has been aggressively expanding its unit count since 1999 and is one of the highest-quality unit growth stories in the restaurant sector. As recently as 2006, there were ten restaurant companies growing units by a 10% or greater annual rate. In 2012, there were only three restaurant companies that delivered 10%+ unit growth: Buffalo Wild Wings, BJ’s Restaurants (NASDAQ: BJRI) and Chipotle Mexican Grill (NYSE: CMG). I expect Buffalo Wild Wings to maintain its 10+% growth rate through at least 2015, driven by the combination of best-in-class new unit productivity, improving unit-level economics, and emerging international development prospects.
From a valuation standpoint, I think Buffalo Wild Wings is significantly undervalued. The company is trading at a forward PE of 20.75, compared to BJ’s Restaurants’ 25.44 and Chipotle’s 28.79. While I do not assume Buffalo Wild Wings deserves to trade in-line with high growth peers, based on the more challenging / competitive segment in which they compete, I do believe the current valuation gap is too wide. And interestingly, on a PEG basis, assuming a 20% long-term EPS growth rate (as per the consensus estimates for the next 5 year growth rate), shares are trading at ~1.18x, while both BJ’s Restaurants and Chipotle are trading close to ~1.6x. Thus, I see a significant upside potential in Buffalo Wild Wings' shares in the long run.
The company has plans to open 105 (60 company owned and 45 franchised) restaurants in 2013. Moreover, management expects to almost double its unit count in North America, as it sees the potential for over 1700 stores in North America alone. International development outside of North America is in very early stages, but the licensing opportunity should provide a relatively significant margin and EPS tailwind in years to come. The company already has eight restaurants in Toronto, with plans to open 50 corporate and franchised locations in Canada over the next five years. Outside of North America, the company has been in discussions with development groups in the United Kingdom, the Middle East, Germany, and the Philippines, as well as existing franchise groups that have operations in Panama and Puerto Rico. Buffalo Wild Wings’ management has been relatively tight lipped, but has indicated that Buffalo Wild Wings units could potentially open for business in both the United Kingdom and the Middle East in the near future. The development deals outside of North America would likely be structured as license agreements, with the company incurring little in the way of incremental corporate overhead costs.
The company is constantly looking for margin enhancing initiatives to offset the pressure posed by increasing chicken prices. It is currently testing, serving its wings in flexible portions rather than fixed quantities, which will decrease the cost of sales impact from future fluctuation in wing size. After monitoring the impact of this test on sales, margins and guest perception in about 60 restaurants, the company will incorporate these changes at its remaining locations in the first half of 2013. Moreover, the company has signed a new distribution contract that covers food, paper, and non-food products and will begin transitioning locations to the new provider in December, with full rollout to be completed by June of 2013. As a result, the company is expecting cost savings of about 40 basis points for its restaurants, with additional savings to come from inbound freight consolidation.
To sum up, Buffalo Wild Wings has been a phenomenal growth story in the past, and I think the company still has significant room to grow domestically as well as internationally. The company seems poised to achieve substantial revenue growth with innovations in food, beverage, and an enhanced guest services strategy. The implementation of serving wings flexible portions across all locations and the new distribution contract will offset the inflation of chicken wings. After the recent weakness, the stock seems highly undervalued on a growth adjusted basis with respect to its peers. I rate it as a buy.
gauravguru has no position in any stocks mentioned. The Motley Fool recommends BJ's Restaurants, Buffalo Wild Wings, and Chipotle Mexican Grill. The Motley Fool owns shares of BJ's Restaurants, Buffalo Wild Wings, and Chipotle Mexican Grill. 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!