Although it has had plenty of its share of fits and starts since its IPO at $17 over a decade ago, Buffalo Wild Wings (NASDAQ:BWLD) over that time has been hotter than its wings. And it's poised to get much hotter.
No, I'm not just talking about its new ghost-pepper sauce that's so hot it comes with its own waiver. I'm talking mostly about growth in its number of restaurant units. Buffalo Wild Wings continues to make a number of changes that should help existing and future store sales and profits, as well such as menu innovation, stadium-feel decor, mobile ordering, and the like. How well these initiatives will do is anybody's guess but we can build a basic idea of the base case for valuation. Let's examine some basic fundamental assumptions.
Assumption no. 1: sales per unit
In the interest of excessive conservatism, let's assume sales go flat on a per-unit basis in the years ahead -- even though CEO Sally Smith recently said on CNBC that the company is looking to "sustain phenomenal growth and deliver for our shareholders."
Next, again in the interest of conservatism, let's assume Buffalo Wild Wings' investments in the PizzaRev and Rusty Taco concepts add nothing to help the overall results, and let's also assume zero contribution from any other future investments Buffalo Wild Wings announces. If things prove better than that, it will just be blue-cheese icing on the spicy cake.
Assumption no. 2: unit number
At the end of the second quarter, Buffalo Wild Wings reported total restaurants of 1,028. In the same CNBC interview, Smith teased about potentially having 4,500 units someday. Last year the company ended with just under 1,000 restaurants and will add over 100 more this year, for a growth of over 10%. Smith stated that the company plans to continue on that pace from there. If you do the math, the chain could see 4,500 restaurants in 15 years at that pace.
Assumption no. 3: net income per unit
A total of 4,500 units would be around 4.5 times higher than the current level. Let's once again remain conservative and assume all costs escalate at the same rate as unit growth and Buffalo Wild Wings experiences zero leverage expansion and zero economies of scale or logistic efficiencies.
Analysts expect adjusted earnings per diluted share of around $5.05 for fiscal 2014. Though analysts have a history of underestimating the results, let's use an even $5 for simplicity. Assuming restaurant profitability of future units continues at similar to current levels, 4.5 times $5 equals earnings per share of $22.50.
Assumption no. 4: valuation
The average P/E ratio for the restaurant industry is currently around 24. Using that average, we're looking at a $540 share price. This again assumes what I think is almost painfully conservative assumptions, but then again there are so many unknowns and uncertainties with any company and the macro picture in general that a conservative basis is often the best way to go as a start, and then hope for upside from there.
Assumption no. 5: what if it all goes wrong?
I should mention a few things that have to not go wrong and and some cautionary concerns as well. For starters, I'm putting a lot of reliance on continued company execution based on its past success That old adage comes into play: historical results may not be indicative of future results.
What if another competitor emerges? Is there anything really that unique and impossible to duplicate about wings and beer? Wingstop Sports seems to be giving it the old college try and if that chain has its way Buffalo Wild Wings will become yesterday's news, reversing unit sales and limiting opportunities for growing new units. I'm sure you can think of other possible things that could go wrong. The restaurant business is as cut throat as they come.
Foolish final thoughts
Given all this and a stock price still under $150, if you believe in Buffalo Wild Wings long term like I do and believe it will continue to thrive in this tough industry through excellent execution, then over the long haul the current valuation versus plans and opportunity seems quite compelling. The valuation seems to leave plenty of room for error. It also prices in no other opportunities, no profit-per-unit growth, and no reduction in overhead allocation per unit. As a side bonus, we can be confident that wings, beer, and sports watching aren't a fad in danger of going away anytime soon. Buffalo Wild Wings remains a buy.
Nickey Friedman owns shares of Buffalo Wild Wings. The Motley Fool recommends Buffalo Wild Wings and Nike. The Motley Fool owns shares of Buffalo Wild Wings and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.