Buffalo Wild Wings are a chain of 494 franchised and wholly owned restaurants in 37 states featuring a variety of menu items including its famous chicken wings spun in one of its 10+ signature sauces. The company’s restaurants also feature a full bar and approximately 40 televisions that are used for sporting events, PPV events, trivia, and video games.
Investment Thesis
BWLD is a BUY at the current market price. I believe that the stock should be trading at a fair value of $30. There are three major reasons why I believe that the stock is undervalued:
1. Company has an excellent management team
2. Cheap valuation
3. Current level of chicken prices is temporary
Management Team
Since the company’s IPO in 2003, it has consistently met its revenues growth targets of 20%, net income growth targets of 25%, and restaurant growth targets of 15%. The management reiterated its forecast for growth in these areas for fiscal 2008 in their investor presentation earlier this month. Despite the increase in chicken prices, management has not cut its spending on its marketing initiative that features commercials on networks such as ESPN, CBS, and The Big Ten Network. In January 2008, the company announced the acquisition of 8 Don Pablo restaurants from the Avado Brands for 1.2 million dollars, putting them on track for an additional 15% increase in the number of restaurants this year.
Cheap Valuation
The stock has been in a downward spiral since its all-time high of 47.75 in June primarily because of macroeconomic fears and the possibility of higher chicken prices in 2008. The restaurant industry in general has been hammered because of the probability of an economic slowdown in the US and its affect on consumer discretionary spending. BWLD is trading at a discount relative to its peers in the restaurant industry even though they have continued to grow throughout the downturn thus far.
The company has no long term debt and is financing their own expansion through their cash flows generated from their operations. Same store sales growth rate has increased north of 6% while the industry as a whole has remained flat. It is clear that BWLD has struck a chord with consumer tastes. I believe that the company can sustain its rate of growth to hit 865 restaurants within 5 years.
Current level chicken prices are temporary
In 2004, BWLD faced a similar increase in the price of chicken wings to an all-time high of 1.45. These price increases were primarily due to a disruption in supply because of avian flu outbreaks in Asia, an increase in US demand because of mad cow disease fears, and a capacity reduction by chicken producers. Despite the increase, BWLD was able to meet expectations by growing their company and passing through some of these higher costs to consumers.
In 2007, price increases of chicken were primarily due to the increase in the costs of inputs (i.e. feed). Foreign demand primarily from Russia and China because of the weak US dollar also attributed to the high price. I believe that these prices will flatten over the next few months. The USDA believes that chicken production will increase its capacity by 2.9% in 2008. I believe that this number will actually be between 3-4% primarily because of the investments that the US chicken producers made in 2007 in new chicken production facilities.
Due to a difference in consumer preferences, the demand from China and Russia is mostly for the dark meat of a chicken. Leg and thigh prices have skyrocketed in the past year. However, chicken breasts and chicken wings have not increased as quickly. Any increases in the demand for US chicken from these markets (as expected because of the further weakening of the dollar) should increase the overall supply of both chicken breasts and wings. These chicken components are the primary component of the Buffalo Wild Wings menu.
Buffalo Wild Wings menu is consistently priced below their competitors. This means that they have the flexibility to raise their prices and plan to pass a 3 – 4% increase on to their customers in 2008.
Catalyst
BWLD is set to report 4th quarter earning in February 2008. In March 2008, the company will announce the terms of their chicken contract with their suppliers. This should provide the catalyst needed to take the stock to its fair market value of $30.
$23.7 (02/08/08)
Agree
Disagree
