Is Buffalo Wild Wings Headed for a March Madness Exit?

by Serge Berger | March 12, 2012 12:15 pm

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free weekly newsletter[2].

College basketball fans across the land will again crowd sports bars to full capacity as March Madness gets under way this week. And Buffalo Wild Wings (NASDAQ:BWLD[3]) is sure to be the targeted place of choice for hungry and thirsty sports fans. As such, I thought I’d look a little closer at the stock.

It’s no secret that BWLD has been on a relentless tear so far in 2012[4], up just about 34% to date — and that’s after a 50% rally in 2011.

Looking at the fundamentals, we clearly see a growth story in the stock. Unit and revenue growth are well above 10% — at 14% and 24%, respectively, on a compound annual growth rate basis. However, that type of data is backward-looking, and the question is whether the company can continue to surprise to the upside with its growth forecast.

Valuation-wise, the stock trades at a solid premium compared to its competitors, such as Darden Restaurants (NYSE:DRI[5]) — Darden trades at a P/E of 15.74, whereas BWLD trades at 31.84. The median P/E for the group is around 17.5.

One potential headwind for BWLD going forward could be the price of chicken wings, which albeit historically volatile did increase 37% in 2011 and already 15% so far in 2012. Depending on their hedging strategy and ability to pass costs along to consumers, this rise in input cost might take a while to hit the bottom line. However, input cost inflation is a problem for many restaurants.

Even food retailer Whole Foods (NASDAQ:WFM[6]) in its last earnings call highlighted the surge in the price of beef and other inflationary signals in food.

Here’s a look at the price of USDA chicken wings:

Note how the orderly uptrend from 2008 to 2011 turned into a vertical leap in 2012 on the weekly chart of BWLD:

On the daily chart, the break above the $71 level came after its blowout earnings in early February, which left a big gap below the market. Currently, BWLD is consolidating well above the gap, and a break above $90 might allow for more upside.

Much like the broader market, however, the stock is overbought on an intermediate-term basis, and the negative divergence in oscillators confirm such. A break below $84 might lead the stock to $80 and possibly down to the $70 level.

As of this writing, Serge Berger did not hold a position in any of the aforementioned securities.

  1. The Steady Trader:
  2. free weekly newsletter:
  3. BWLD:
  4. a relentless tear so far in 2012:
  5. DRI:
  6. WFM:

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