Buffalo Wild Wings (NASDAQ:BWLD) has been down sharply in recent days because of an earnings report that missed investors' expectations. The company turned in earnings of $1.73 per share, while investors had expected $1.78. This drop, however, may be a great opportunity for long-term investors looking for a great business selling at a bargain price.
One way to tell if an investment will do well over the long term is to look at its earnings track record. While past performance is no guarantee of future success, it seems fair to say that a company that's done well in the past, may be able to do so going forward. To that end, Buffalo Wild Wings delivered a solid hit with 13% earnings growth in its most recent quarterly performance. The company was able to do so in part by increasing its store count and decreasing its expenses.
The number of Buffalo Wild Wings restaurants increased by almost 100 in the first quarter, and the company was able to decrease two of its largest expenses, cost of sales and labor, as a percentage of its total revenue in this quarter. Not all was sunny though as the stock dropped 11% on news that same-store sales fell 1.7% at company-owned locations. Also, management lowered its guidance for the year.
A broader look at Buffalo Wild Wings' long-term earnings performance shows that the company has turned in average earnings growth of almost 26% over the past 10 years. This last number is very important, as it's much higher than the market average and shows a long track record of results.
Return on equity
Another way to tell if an investment will do well over the long term is to look at its return on equity, which can simply be thought of as how much profit a company makes off investors' money. A look at Buffalo Wild Wings' return on equity shows that the company generated a 15.47% return on equity in 2015. That's higher than the market average of about 11% and indicates that management is able to put investors' money to good use.
A step back shows that Buffalo Wild Wings has been able to generate an average return on equity of 16% over the past 10 years. This, again, is higher than the long-term market average and shows that management is good at investing shareholders' dollars over long periods of time. If this trend continues, investors should get strong returns.
Buffalo Wild Wings has posted a fairly large fall over the past 12 months as the stock has dropped nearly 26% since April of last year. A bargain may be at hand, and simple valuation metrics can tell us if this is the case.
Using trailing earnings, Buffalo Wild Wings' shares trade at about 25 times earnings. By comparison, the trailing earnings multiple for the market is about 24. Given this information, Buffalo Wild Wings appears to be fairly valued. However, a look at forward earnings projections shows that the stock may be selling at a slight discount. Buffalo Wild Wings' shares trade at a forward multiple of almost 18. So if investors' expectations for 2016 earnings play out, then the stock is slightly undervalued compared with the market.
In the final analysis, Buffalo Wild Wings has a solid record of earnings and returns on equity. This performance is a good indicator that the business should be able to produce good results going forward. The recent drop in price therefore gives investors an opportunity to buy shares of a great business at a slight discount to the average large-cap stock.
Adam Brownlee has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Buffalo Wild Wings. 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.