Buffalo Wild Wings (NASDAQ:BWLD) stock has taken flight. By taking the “wing” out of chicken wings, BWLD stock is set to ride the recent bounce into a long term growth plan.
The struggling restaurant chain (BWLD stock was down more than 30% year-to-date heading into the company’s third quarter earnings report) reported an earnings smasher. The huge beat has BWLD stock up more than 20%.
Street estimates weren’t even close to the $1.36 earnings per share number BWLD reported. Granted, that $1.36 number had about $0.27 worth of accrual adjustments in it, but the remaining $1.09 was still miles above what the Street was looking for.
And the big beat was driven primarily by the company’s ability to turn traditional chicken wing fans into boneless chicken wing fans.
‘Boneless’ Saving Gross Margins and BWLD Stock
It is no secret that chicken wing prices are soaring. They were up 26% year-over-year in the third quarter. That has taken a huge hit on BWLD’s margins because, well, the company is known for selling chicken wings. But boneless wings look and taste more-or-less just like traditional wings, except that they cost a whole lot less to make.
So BWLD is making the traditional to boneless transition. The company turned it is big Tuesday promotion from a half-priced traditional wings offering to a boneless BOGO (buy one, get one free) offering.
The switch caused the company to lose some traffic (as it turns out, there are some people who just won’t go boneless). But around 50% of that lost traffic was from take-out orders under $10, which is a really low-margin revenue stream for Buffalo Wild Wings. Essentially, then, BWLD is phasing out low-margin revenue and phasing in higher-margin revenue. The result was a 130 basis point improvement in gross margins.
The critical thing to note here is that only 41% of BWLD locations have made this transition, implying that there is a lot more room for gross margin improvement, regardless of chicken wing prices, as more locations go boneless.
BWLD Remains Undervalued
The huge improvement in cost-savings has BWLD stock soaring, but even after this 20% post-earnings move, BWLD stock remains undervalued.
BWLD earned almost $5 per share on sales of $1.5 billion in 2014. At that point in time, net profit margins were hovering around 6%. Now, they are hovering around 3% thanks to higher chicken wing prices.
But those chicken wing prices won’t remain high forever, and even if they do remain high for a lot longer, the shift to boneless chicken wings should allow for margins to normalize back to 2014 peak levels at some point in the foreseeable future.
Moreover, this is a company that has grown sales at a mid-teens compounded annual growth rate over the past several years. Granted, that growth is slowing (10% increase last year and up less than 3% so far in 2017), but positive sales growth should be a lock into the foreseeable future given positive unit growth and comparable sales growth that should stay around the flat-line.
Call it a measly 3% sales growth per year over the next several years. Assuming sales hit the $2.07 billion mark Wall Street is expecting this year, that puts sales at just shy of $2.4 billion in 5 years. A 6% profit margin would imply net profits of just under $144 million. Using the current weighted-average diluted share count number of roughly 15.5 million, that implies earnings per share of about $9.30.
That would represent about 16% annualized growth from this year’s expected earnings base of $4.45 per share.
Currently, BWLD stock trades at 27-times that $4.45 earnings base. A 27-times multiple for 16% multi-year growth potential isn’t that bad. It is good enough for a price-to-earnings/growth (PEG) ratio of under 1.7, while the S&P 500 is trading at a PEG ratio of over 1.8 (19.6-times 2017 earnings on annual growth projections of 10.7%).
Bottom Line on BWLD Stock
This beaten up stock is in rebound mode thanks to cost-saving initiatives kicking in. Those cost-saving initiatives imply strong earnings growth over the next several years from this year’s depressed base.
BWLD stock still trades at a more attractive valuation than the market. Consequently, I think the stock is undervalued and believe there is good upside from here.
As of this writing, Luke Lango was long BWLD.