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BWLD Branches Out With Majority Stake in Rusty Taco

Buffalo Wild Wings (BWLD) announced late last month that it made a majority investment in Rusty Taco, an operator of nine fast-casual restaurants in Dallas, Denver and Minneapolis/St. Paul. Looking to accelerate its growth, Rusty Taco is the second investment for BWLD outside its chicken wing domain; the other being Los Angeles-based PizzaRev, a “Craft Your Own” pizza joint.

bwld, buffalo wild wings, rusty tacoOthers hot restaurant stocks, such as Chipotle (CMG) and Yum Brands (YUM), are driving down the same path by taking interest in new stores that have little to do with their core brands. Much like venture capital, only a few concepts will survive and even fewer will thrive.

But Buffalo Wild Wings is making investments in the right ways, which should provide a boost for BWLD stock in the long term. Let’s break things down to find out what it’s doing right.

BWLD Has Room to Grow

When you think tacos, three stocks come to mind: Yum Brands’ Taco Bell, Chipotle and Jack in the Box’s (JACK) Qdoba Grill. The three chains combined operate almost 8,000 units worldwide, completely dwarfing Rusty Taco. For Buffalo Wild Wings, inserting Rusty Taco into the conversation won’t be easy.

Steve Dunn is CEO and co-founder (with the late Rusty Fenton) of Rusty Taco. In the press release announcing the deal, Dunn stated, “We are delighted to be partnering with Buffalo Wild Wings and believe it can have an immediate impact in helping accelerate our growth.” That may be standard PR-speak, but he’s not exactly wrong, either.

BWLD has grown its own unit base over the last decade by 15% per year, yet it still only has 1,027 units open against a potential global footprint of 3,000. There’s a perception that its best days are behind it … when, in fact, BWLD is only getting started. There are currently nine locations in the Golden Horseshoe (the area surrounding Toronto, Canada) serving a population of nine million and expected to grow to 11.5 million by 2031.

By comparison, there are 11 locations in Kentucky, a state with a population of less than five million. Kentuckians need not take offense, but Toronto is a much bigger fishbowl. BWLD could easily double the number of units in that area, despite there being significant local competition.

My point? BWLD has enough business on its own plat,e yet it’s laying the foundation for future growth. That’s good news for BWLD stock.

Rusty Taco and PizzaRev

The two chains have a couple of things in common. First, they’ve both got limited operating histories (PizzaRev’s and Rusty Taco’s first stores opened in 2012 and 2010 respectively) and secondly, they operate a relatively small number of units (PizzaRev has 18, compared to nine for Rusty Taco). In other words — they’ve got potential for growth. But potential and reality are two entirely different things.

PizzaRev plays in a pizza market where the top five competitors have more than 20,00 units open; Rusty Taco’s peer group’s not much better at 9,000. That’s a tough nut to crack, despite both chains bringing quality products to the table. Of the two, I’d bet the opportunity for growth for tacos is larger than pizza — which could explain why BWLD has a majority investment in Rusty Taco but only a minority investment in PizzaRev. We’ll know more in the quarters ahead.

Either way, revenue from both investments likely won’t be materially for at least the next couple of years. It’s truly a venture capital proposition.

So Why Do It?

Like an oil & gas producer, a smart restaurant is always planting seeds of growth because you know your current wells are going to eventually run dry. You can open a test restaurant as Chipotle did with its ShopHouse Southeast Asian concept in 2011 or you can partner with existing restauranteurs on concepts you feel can be rolled out in relatively large numbers.

The latter choice is often preferable because it allows you to leverage your expertise without lending too much in terms of existing personnel. Chipotle has done both; it’s quite possible BWLD will do the same, but for now it’s sticking to making equity investments in projects it believes can work over the long haul.

As I’ve said several times in this article, it’s a process very much like venture capital where you make several bets in order to improve your odds of hitting a home run. All BWLD needs is one hit for shareholders to be handsomely rewarded.

BWLD Bottom Line

BWLD stock is down 20% over the last three months through September 23. Investors didn’t like its 2014 earnings guidance delivered at the end of July in its Q2 report. BWLD management is calling for 25-30% EPS growth year-over-year, but analysts were expecting 35% growth.

Consider this a gift from the investing gods.

The 20% decline is only the second time in the past five years that BWLD stock has declined by 20% or more over a three-month increment. The previous drop occurred in July 2010. I’m not necessarily saying that it’s undervalued … but since its late-summer slide, it’s certainly not expensive.

I’d buy a little now and wait for a market correction to get more. BWLD is investing in its future, and that’s a good thing if you own BWLD stock.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/bwld-stock-rusty-taco/.

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