In the Heat of the Chicken Wing Craze, is B-Dubs a Good Play?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earlier this year, competitive eating icon Takeru Kobayashi reached an epic career milestone, downing 337 buffalo wings in 30 minutes at Wing Bowl XX. He smashed the previous record by 82 wings. Here are some highlights of this contest for your viewing pleasure. While this gut-busting achievement is nothing any mere mortal can reach, it can serve as a microcosm of Americans’ ever-growing demand for any and all types of chicken wings. Currently, one pound of those delectable delights costs around $1.50, up nearly 40 percent since 2008. While there is a clear seasonal pattern for wing-lovers, many restaurants are capitalizing on this demand uptick year-round, and even making entire business models around the premise.
A perfect case in point is Buffalo Wild Wings (NASDAQ: BWLD), which has seen its stock price soar more than eightfold since its IPO in 2003. In a post-recessionary environment devoid of growth, the company has effectively siphoned the wing boom into its top line, increasing revenues by an average of 22.9 percent per annum in the past three years. Interestingly, this dwarfs the restaurant industry’s average (4.4%), and competitors like Darden Restaurants (NYSE: DRI) at 4.2%, Brinker International (NYSE: EAT) at -13.3%, Ruby Tuesday (NYSE: RT) at -2.4%, and DineEquity (NYSE: DIN) at -12.7%.
To no surprise, B-Dubs – as its customer base calls the chain – also trumps the competition in the earnings department, having grown its bottom line by 26.2 percent a year since 2009. In the first quarter of this year, BWLD reported earnings of $0.98 a share, beating the Street’s estimates by 2 cents. More importantly, though, revenues were up 37.8 percent year-over-year, giving a strong possibility that the company will meet its year-end targets. Specifically, analysts are expecting BWLD to finish 2012 with an EPS of $3.27, up from the $2.73 it reported in 2011. By 2013, this estimate jumps another 19 percent to $3.89 a share.
From a valuation standpoint, it appears that investors have yet to “catch up” to BWLD’s earnings growth, as the stock currently trades at a PEG ratio between 0.9 and 1.0, which is on the border of being undervalued. Interestingly, the stock is trading at a P/E ratio (28.7X) slightly off its post-IPO average (28.9X), but above its major competitors and the industry average. It looks as though Buffalo Wild Wings is priced for growth, and as long as it maintains its current path, there should be more gains in the future. Assuming that the company hits its year-end EPS target, it should hit $90 a share by Christmas time. By this time next year, shares of BWLD can break above the $100 mark if long-range estimates hold.
In addition to solid potential for capital appreciation, BWLD has grown its operating (41.4%) and free (66.7%) cash flows at significant annualized rates over the past three years, though it still trades at a price-to-cash flow ratio (10.2X) below the industry average (14.1X). When growth is factored into the equation, the stock sports a price-to-cash flow growth ratio of 0.2; typically any figure below 1.0 signals undervaluation. The computation of the PCFG ratio is just the same as the PEG ratio; here’s a good place to freshen up on these metrics if you need to.
Now, one game-changer that we haven’t mentioned yet is Buffalo Wild Wings’ new redesign project. As of this summer, the company has announced that it will revamp its restaurants, adding more of a “stadium feel” to each one. While this doesn’t mean that patrons will have to sit on bleachers covered in stale beer and peanut shells, it does likely mean more TVs, sporting event-specials, and seating capacity. See, it appears that B-Dubs’ execs have long realized that their establishments can be “the place” to watch Sunday football games, provided that fans are given the appropriate atmosphere. While it’s obvious that its wing enthusiasts already know this, a greater focus couldn’t hurt. Here are a few shots of the new plans.
To recap: Buffalo Wild Wings is a high-growth restaurant chain in a low-growth industry, trades at relatively attractive PEG and PCFG ratios, has a fresh redesign project in the works, and is perfectly positioned to continue to ride the Buffalo wing craze. Kobayashi would be proud. WealthLift’s Sentiment Index rates BWLD as a strong buy, with 85.71 percent of the community’s users placing an “overperform” rating on the stock.
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned above. The Motley Fool owns shares of Buffalo Wild Wings and Darden Restaurants. Motley Fool newsletter services recommend Buffalo Wild Wings. 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.