Buffalo Wild Wings (BWLD) was one of the top performers in a recent stock screen for companies that exhibited steady, predictable, growth with little debt. As part of the value investing workflow we developed in an earlier article, a detailed analysis must now be conducted, followed by a determination of BWLD’s intrinsic value.
BWLD is a restaurant owner, operator, and franchisor operating primarily in the United States, with a few locations in Canada as well. Restaurants are themed as sports bars, but attempt to be equally friendly to both sports fans and families alike. They have managed to succeed in obtaining a dominant position with their brand, and the company’s restaurants are the destination of choice for Sunday football as well as other major events. The company was founded in 1982 and has been publicly traded since 2003.
Buffalo Wild Wings has enjoyed phenomenal and consistent growth over the past decade. EPS has grown at a compounded annual rate of 24% over the past five years with sales growing only slightly lower at 23% / year. As of today, BWLD was trading for $71.94 which translates to a market cap of $1.34 billion. The company meets all of the other PGLD criteria as well, and boasts zero long term debt. Let’s look a bit deeper at the latest quarterly and annual reports to get a better picture.
Buffalo Wild Wings owned 343 restaurants and supported 511 franchised restaurants at the end of the 3rd quarter. The most recent quarterly report was issued October 23, 2012 for the period ended September 22.
3rd Quarter Highlights
- Very strong revenue growth of 24.8% over the prior year’s 3rd quarter.
- Solid same store sales growth of 6.2% for company owned restaurants and 5.8% for franchised stores.
- Plan to open an additional 24 company owned stores and 20 franchised restaurants by the end of 2012.
- Plans for 2013 include the opening of 60 company-owned and 45 franchised restaurants, and should achieve the 1,000 unit mark.
- The company now anticipates they can expand to 1,700 locations in North America, with additional growth abroad.
- Guidance provided of 15% net earnings growth for 2012, and 20% growth for 2013.
3rd Quarter Lowlights
- EPS for the quarter dropped 6.6% to $0.57 from $0.61 a year ago. Poor earnings were attributed to the rising cost of chicken due to the drought, and incremental pre-opening expenses for new stores.
The 3rd quarter earnings were a disappointment, but largely out of the company’s control due to the factors surrounding the increased cost of chicken. The company is unable or unwilling to increase menu prices commensurate with the cost of raw goods. Strong earnings guidance from the company is a good sign however. The positive outlook with respect to store counts bodes well for the company also. Let’s have a look at the most recent annual report to see if there is further details that are of note. The most recent annual report was issued on February 21, 2012 for the fiscal year ended December 25, 2011.
Additional Information from the 2011 Annual Report
- Purchase of franchised restaurants from franchisees is part of the plan to increase earnings.
- Restaurants feature a full bar which offers an extensive selection of 20 to 30 domestic, imported, and craft beers on tap as well as bottled beers, wine and liquor.
- Restaurants typically host 50 high-definition flat-screen monitors and up to 10 projection screens throughout the restaurant to allow for easy viewing.
- As of 2011 fiscal year end, BWLD owned or franchised 817 restaurants in North America, of which 319 were company-owned and 498 were franchised.
- It’s anticipated that future restaurants will average 4,500 square feet to 6,500 square feet with an average cash investment per restaurant of approximately $2.0 million, excluding preopening expenses of approximately $275,000.
- The raw cost of chicken wings was identified as having the potential to severely impact earnings potential. Chicken wings accounted for approximately 19%, 24%, and 25% of the company’s cost of sales in 2011, 2010, and 2009, respectively.
- The company does not intend to issue a dividend in the near future.
- Diluted EPS increased to $2.75 in 2011 from $2.10 the year prior, an increase of 30.9%.
- Total revenue increased to $784.5 million in 2011 from $613.3 million the year prior, an increase of 27.9%.
Based on a detailed review of the information available, it appears that BWLD meets the intent of our PGLD stock screen and is worthy of further analysis. The next step will be to determine an estimate of the stock’s intrinsic value and target entry price.
Determining the Intrinsic Value
We will use the EPS Growth Capitalization method to determine a present day intrinsic value for Bio-Reference Laboratories. Be sure to check out the complete guide to this technique.
Analyst consensus is that Buffalo Wild Wings will grow at a rate of 20.7% per year over the next five years. Although BWLD easily achieved this rate of growth over the past several years, the company itself lowered the earnings forecast to 15% for 2012 and 20% for 2013, so unless chicken wing prices come down, the consensus growth rate may be a bit optimistic. I am going to opt for a more conservative estimate of 19% annually for our intrinsic value calculations.
BWLD’s average annual PE ratio has ranged over the past ten years from a high of 41.3 in 2003 when the company first went public to a low of 20.7 in 2008. The overall average PE over the past five years was 23.1 and it was 27.2 since 2003. As of today’s close, the PE ratio was 24.8. Based on historical data and expected growth rate going forward, I believe a future PE of 23.1 is realistic, and will be used in the intrinsic value calculation.
Summary of all inputs to the calculation:
- Future EPS growth: 19% (estimated)
- Future PE ratio: 23.1 (estimated)
- Current EPS (ttm): $2.90
- MARR: 15%
- Timeframe: 5 years
Based on a compound growth rate of 19%, the future value calculation results in a predicted EPS of $6.92 in five years time. If BWLD were to trade at a PE ratio of 23.1, this would equate to a share price of $159.86. To achieve our minimum acceptable rate of return of 15%, the present value of the stock and hence our intrinsic value equates to $79.48 per share.
A margin of safety must be applied to the intrinsic value to account for any errors in our estimation, and should be based on the confidence level we have in the predictions. The estimated values we’ve used thus far have been realistic. Let’s have a look again and choose some more conservative numbers to see how that affects the intrinsic value. Let’s try a PE of 20 which is marginally lower from where it’s trading today, and let’s also assume that high chicken wing prices continue to cause problems for the company moving forward and cause EPS growth to slow to 17.5%. Running the numbers again results in a lower intrinsic value of $64.58 per share, which represents an 18.7% discount to the original intrinsic value of $79.48. Therefore, a 20% margin of safety should protect us from the uncertainty in our calculations, which results in a target entry price of $63.58.
Buffalo Wild Wings will be added to the stockodo watch list with a target entry price of $63.58 based on an intrinsic value of $79.48 and 20% margin of safety.