Buffalo Wild Wings Is Priced for Perfection


Buffalo Wild Wing's (Nasdaq : BWLD) growth has been substantial in recent years, as the American market has digested many wings and alcoholic beverages. With growth-in-mind, the companies expectations to grow to 1700 locations within the US and Canada leaves many unanswered questions for Foolish investors interested in the restaurant's stock. If the company is able to reach its goals by 2019, the stock is priced substantially high as it has a lot of share value unaccounted for through its current North American market.

Historical growth
Buffalo Wild Wings (NasdaqGS : BWLD) was founded in 1982 near Ohio State University. In 1991, Buffalo began the franchising program and in 2003 completed its initial public offering. As of December 29, 2013, Buffalo owned and operated 434 "company-owned" restaurants and franchised an additional 558 restaurants in North America (United States and Canada). There is currently one franchised international (outside of the United States and Canada) restaurant.

 

2009

2010

2011

2012

2013

Company owned

232

259

319

381

443

Franchised

420

473

498

510

559

Total

652

732

817

891

993

% Growth

 

12%

12%

9%

11%

SEC Filing 2013 10K page 19

The above chart shows that the company has grown its locations at approximately 10% annually since 2009.

Future growth

In 2014, Buffalo expects to open approximately 45 company-owned restaurants, 40 US franchised restaurants, and 10 international franchised restaurants. In most of the existing markets, Buffalo plans to continue to open new restaurants until a market is penetrated to a point that will enable it to gain marketing, operational, and cost efficiencies. As more stores are created, these costs will decrease because they should be able to negotiate better pricing with suppliers. Also, Buffalo advertises primarily on a national level. It assesses a 3.5% of sales advertisement fee from its franchisees. Essentially, as more stores are formed, it will be able to advertise more, as well as give more exposure for it's other stores since advertising is primarily national.  Buffalo states that it will expand its infrastructure and control systems to support about 1,700 restaurants in the United States and Canada.

The company will continue to utilize the blended company-owned and franchise strategy. There may be some cannibalization as Buffalo plans to acquire some franchised restaurants and turn them into company-owned restaurants.

 

Valuation
Assuming the 1700 store expansion goes according to plan, the stock appears priced to perfection. If we assume that revenue will continue to grow 20% over the next three fiscal years, and 10% in 2017 and 2018, and 5% in 2019; total revenue will reach approximately $2.8 billion by 2019. These assumptions are chosen because the company has grown at approximately 24% on average over the past five years. As store growth moves toward the 1700 capacity, sales growth will inevitably decrease.

The 6% net profit margin which Buffalo achieved the past three years was projected out for all years, which I believe to be reasonable since competition will put downward pressure while economies of scale will put upward pressure on its net margin. The 6% seems reliable since the business model is very stable as they sell alcohol and food products.

 

2014

2015

2016

2017

2018

2019

Total Revenue

 $1,520,063

 $1,824,075

 $2,188,890

 $2,407,779

 $2,648,557

 $2,780,985

Shares outstanding

$18,940,000

$19,000,000

$19,000,000

$19,000,000

$19,000,000

$19,000,000

Revenue per share

 $80.26

 $96.00

 $115.20

 $126.73

 $139.40

 $146.37

Profit per share

 $4.82

 $5.76

 $6.91

 $7.60

 $8.36

 $8.78

The above chart provides what earnings per share will likely look like by the time Buffalo is fully saturated in its key demographic markets.If the projected earnings are added with current book value of $25, Buffalo's book value by 2019 is worth approximately $67.

Current BV/Share

 $25.00

2014

 $4.82

2015

 $5.76

2016

 $6.91

2017

 $7.60

2018

 $8.36

2019

 $8.78

Value at US/Canada Saturation

 $67.24

Market price

 $144.00

Long term/Spec value

 $76.76

Given that the stock is trading at $144, this means that there exist approximately $77 in long-term/speculative value. This "speculative value" is a lot to pay for in my opinion since we have not done any discounting and international expansion at this point is just wishful thinking.

Foolish Takeaway

Buffalo has expanded very well since its IPO in 2003. The company's internal growth strategy shows that the stock is priced-for-perfection. Given the above assumptions, if the company expands to 1700 locations there is $76 dollars out of the current $144 market price, which is unaccounted for. Given these facts, foolish investors focused on the long term may want to wait to invest in this wild stock.


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