Investors are clucking about Buffalo Wild Wings (BWLD) after its earnings report on Tuesday. Yet, if you look closely at what’s going on, the business is in great shape with just one problem flapping around.
See, the company is named Buffalo Wild Wings. This refers not only to their signature food dish, but also to the price of the associated commodity: chicken wings.
Prices on commodities can be volatile. They are and have been for the past year or so.
The CEO warned investors about an increase in wing prices, it has come to pass, and BWLD stock has fallen 14% since the earnings report.
But if you ask me, investors need to stop running around like chickens with their heads cut off.
BWLD Operations
Look at the core operating metrics. Total year-over-year revenue increase for BWLD was 19.8%, which is pretty darn special, and that increase was the result of enviable same-store sales increases of 7% for those company-owned stores and an equally impressive 6% for franchise stores.
While franchise royalties don’t make up a huge part of parent revenue, I’m not going to look a gift chicken in the beak. It’s money that comes with no expense. Obviously, BWLD has enough value to entrepreneurs that they are happy to get in on the action in exchange for royalty payments. Those payments increased almost 12% YOY.
So we return to those wild wings, where the massive 41% YOY cost increase pretty much slaughtered all the good news. That, plus labor costs, placed a $51 million yoke around the company’s neck in the form of increased expenses.
This didn’t seem to rattle the CEO, who still promises 18% EPS growth this year.
BWLD Stock Is More Than a Restaurant Play
I have to admit I blew it with BWLD when it came to market. I thought it was just another chicken restaurant. Who needs it? Except it isn’t just another chicken restaurant any more than Starbucks (SBUX) is just about coffee.
Starbucks is about creating a place to meet in between work and home. BWLD is, well, it’s right there in the description. It’s a sports-bar experience. Chicken just happens to be a part of the deal.
Sports bars are always packed, but nobody had created a chain with quality food, plenty of big-screen TVs and lots o’ liquor. The key to a business like this is consistency. You know what you are getting when you walk into any BWLD.
Okay, so the stock has tanked after earnings, down below $160. What’s the play?
For starters, BWLD owns $113 million in cash but has zero long-term debt, thus it has $6 per share in cash, and an effective price of $153. Last year’s earnings came in at $4.95 per share, so an 18% increase would project $5.84 for this year.
That means BWLD stock is trading at a PE of 26, or a PEG ratio of 1.4. While I prefer more value in my growth stocks, so they are more GARP stocks, a PEG ratio of 1.4 for a quality company like this is not too much to pay. When you factor in the 16% decline from its 52-week high, it makes for a compelling stock to consider.
So expect some near-term volatility thanks to the wing price issues, but over time I think you can see some good returns here.
As of this writing, Lawrence Meyers was long SBUX. This article is for informational purposes only and does not constitute an offer or solicitation to buy or sell shares or securities in any company mentioned. This article does not constitute investment advice. Do your own due diligence and confer with your financial advisor before buying or selling any security. The author has not received compensation, directly or indirectly, current or prospective, from any known issuer, underwriter, or dealer in conjunction with the writing of this article.
