Can this Restaurant Run Even Higher After Earnings?

A restaurant with growth is rewarded with a large premium on fundamentals, making an investment a difficult decision for investors. However, in the case of Buffalo Wild Wings (NASDAQ: BWLD  ) , are investors getting the perfect combination of growth and value?

A strong report
Buffalo Wild Wings reported earnings on Wednesday, and saw double digit returns as a result of its quarter.

The company posted overall sales gains of 27.9%, including same store sales growth of 4.8% at company-owned restaurants. Moreover, the company guided for same-store sales growth of 5.3% in this upcoming quarter, and saw its net earnings increase 66.9%.

Compare for value identification
With all things considered, Buffalo Wild Wings is a company with 25% top-line growth and net earnings growth at an even faster rate. Granted, much of the reason that margins have risen is related to the decline in chicken wing costs , which may not last. However, despite this unknown the company is still growing rapidly and continues to guide for even faster growth.

Therefore, is Buffalo Wild Wings a good buying opportunity? Sure, the company is growing fast, but the only way to know with absolute certainty is to see how it compares to its peers.

Chipotle (NYSE: CMG  ) is often compared, and during its last quarter saw revenue growth of 18%. The company churned up same store sales growth of 6.2 %, suggesting that more people are coming into existing stores and that store expansion has slowed compared to Buffalo Wild Wings. Nonetheless, Chipotle has been one of the best performing stocks in the month of October as investors celebrate its strong quarter.

Noodles & Company (NASDAQ: NDLS  ) and Potbelly (NASDAQ: PBPB  )  recently had successful IPOs. While the market apparently liked these companies at their IPOs, their growth lags that of Buffalo Wild Wings.

Potbelly saw revenue growth of 11.7% in its last quarter, and its same store sales grew just 1.5% in the first half of the year . Noodles saw revenue growth of 18.2% in its last quarter including same store sales growth of 4.4 %. However, Noodles guided for its 4.4% growth at existing stores to fall to a 3% rise in this current quarter. Clearly, this trend is the opposite of Buffalo Wild Wings, a company guiding for an acceleration in growth.

What do the metrics tell us?
When we look at the growth of these four companies, it is clear that Buffalo Wild Wings has the greatest overall growth, while Chipotle is seeing existing stores grow slightly faster. Neither Potbelly nor Noodles compares, despite being smaller companies with more room to expand. With this in mind, we turn to valuation in an attempt to find the best value, knowing that Buffalo Wild Wings and Chipotle should trade at a premium to Noodles and Potbelly thanks to accelerated growth.

 

Buffalo Wild Wings

Chipotle

Potbelly

Noodles

Market Cap

$2.7 billion

$16.3 billion

$760 million

$1.29 billion

Forward P/E ratio

31

40.4

74.0

79.0

Price/Operating Cash Flow

17.4

31.7

28.4

33.75

Operating Margin

7.5%

16.7%

3.6%

5.5%

Price/Sales

2.29

5.29

2.74

3.94

Looking at the table above, Chipotle deserves the premium due to its growth. Also, given its size, investors should be particularly impressed that it can maintain such growth. On the flip side of that statement, investors also have to wonder how much larger can the company become? In addition, costs have risen for Chipotle, margins have declined, and investors must wonder if traffic will remain robust if the company boosts its prices.

Moreover, given the size disconnect between Noodles and Potbelly in comparison with Chipotle, there really is no reason for either company's lack of growth. Both Potbelly and Noodles should be able to expand rapidly, and investors should find their lack of same store sales growth worrisome.

With that said, Buffalo Wild Wings shows a clear disconnect in its valuation and performance relative to the space. This is a company that should have the premium of Chipotle, or close to it, yet it is cheaper than either Noodles or Potbelly.

Final Thoughts
Granted, none of these stocks are cheap relative to the S&P 500, but Buffalo Wild Wings looks to be the greatest value. When looking for potential investmentsg, it is important to compare apples to apples, meaning to assess a company beside its peers. When doing this exercise, I'm not sure how you can't be optimistic that shares of Buffalo Wild Wings still have significant room to run higher.

Did Buffalo Wild Wings make the Fool's list of its favorite growth stocks?
Tired of watching your stocks creep up year after year at a glacial pace? Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering truly wealth-changing stock picks. And he wants to share it, along with a few of his favorite growth stock superstars, WITH YOU! It's a special 100% FREE report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains... and click HERE for instant access to a whole new game plan of stock picks to help power your portfolio.


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2712099, ~/Articles/ArticleHandler.aspx, 10/25/2014 3:27:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement