Will Wet Weather Save Buffalo Wild Wings From a Weak Economy?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Like many other stocks vulnerable to rising feed costs for livestock, Buffalo Wild Wings (NASDAQ: BWLD) has been hit hard by the drought in the Midwest farm belt of the United States. The soaring price of corn has eaten into the profit margins of companies such as Hormel (NYSE: HRL), McDonald's (NYSE: MCD), Tyson Food (NYSE: TSN) and Yum! Brands (NYSE: YUM).
This has raised the price of meat and feed needed for the products of Hormel and Tyson Food. For McDonald's and Yum! Brands, which owns and operates KFC and Taco Bells around the world, this has pounded away at margins due to the higher commodity costs for McNuggets, fried chicken, and chicken tacos, burritos and enchiladas. But for Buffalo Wild Wings, it has been truly devastating as it is at the mercy of the cost of chicken wings for its more than 800 restaurants in 48 states and Canada.
In June of 2011, chicken wing prices were under $0.90 a pound. By December, the price had increased to $1.51 as football season increases the demand. Now around $1.80, Buffalo Wild Wings expects that chicken wing prices will rise to $1.95 in the Fall. Chicken wing prices could go over $2 a pound in 2012, depending on the severity of the drought. Rain in the Midwest could change that, but it is too late for this growing season. From this, the exchange traded fund for Corn, Teucruim Corn, is up 18.83% for the month. Traders are certainly not expecting cheaper corn, particularly if the Federal Reserve initiates stimulus measures that will raise the price of commodities as happened over the course of Quantitative Easing 2.
This is not the economy to be passing along higher prices to customers, either. At just 1.5% economic growth for the first quarter of 2012, the low prices of McDonald's and Yum! Brands become even more appealing to the American consumer. In addition, Buffalo Wild Wings has a wait staff, which adds on another 15%-20% to the bill. The atmosphere is hardly a value added to compensate for the higher prices as one recent analyst article reported that, "According to Consumer Reports, Buffalo Wild Wings was a laggard that was criticized for value and noise as well as listed among the least likely to sell healthful fare as its signature dish is Buffalo, New York-style chicken wings with 18 signature sauces and seasoning choices."
The analyst community projects long term earnings growth of 20% for Buffalo Wild Wings. Based on the current price-to-earnings ratio, Buffalo Wild Wings will be trading over $150 a share by the fourth quarter of 2017. That would be a very healthy annual return in the double digits as the stock price would have to more than double from the current level.
It is difficult to see that happening based on the current trends in both the supply and demand equation for Buffalo Wild Wings. The rise in the price of chicken wings is likely to endure with a debilitating impact on the share price of the stock, according to Howard Penney, an analyst with Hedgeeye Risk Management. If the Federal Reserve undertakes economic stimulus measures, as the market is expecting, commodity prices for corn and other items are likely to rise with the US Dollar falling, as happened before. That could increase the price of chicken wings even more if corn continues soaring.
At present, Buffalo Wild Wings has a profit margin of just 6.03%, so there is not a lot of wiggle room for higher costs. Being so exposed to the rising cost of corn like Buffalo Wild Wings, the profit margin for Tyson Foods is only 1.82% and for Hormel Foods, it is 5.91%. By contrast, McDonald's has a profit margin of 20.03% and Yum! Brands has one of 11.58%.
On the demand side, it is tough to be bullish on the economy. Economic growth has plunged over the last three quarters in the United States. Consumer confidence is falling according to the Thompson Reuters/University of Michigan survery. Chicken wings are the raison d'etre for Buffalo Wild Wings and its patrons. For many other competitors, these are a loss leader to lure in customers.
If the economy worsens, more will eat at home rather than watch the football game at Buffalo Wild Wings. This is aleady happening, with attendance dwindling at games as many prefer to watch from the comfort of their home. At home, chicken wings are not that tough to prepare; and they can be bought already cooked and ready to eat from many grocery stores.
Now trading around $74.50, the mean analyst target price for Buffalo Wild Wings over the next year is $85.73. However, analysts project that long term earnings-per-share growth will fall by about one third from the present level for the next year and over the next five years. The short term trend is definitely not the friend of the shareholders, either, as Buffalo Wilds Wings is trading 10.68% below its 20-day moving average, 11.12% beneath its 50-day moving average, and 2.93% under its 200-day moving average.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Buffalo Wild Wings and McDonald's. Motley Fool newsletter services recommend Buffalo Wild Wings, McDonald's, and Yum! Brands. 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.If you have questions about this post or the Fool’s blog network, click here for information.