Small-cap companies are absolutely one of my favorite areas to research because you can often uncover hidden gems that analysts have neglected or simply not discovered yet. They can offer the ultimate risk-vs.-reward ratio, but also are often not for the faint of heart.

Last week, I detailed my mission to find the 10 small caps to rule them all. For week two of this 10-week series, I'm highlighting casual-dining chain Buffalo Wild Wings (Nasdaq: BWLD).

What it does
Buffalo Wild Wings is an owner, operator, and franchiser of casual-dining restaurants throughout the United States. Since 2005, yearly revenue has tripled from $210 million to $613 million. Profits and shareholder equity haven't skipped a beat either, with each rising annually by double digits.

How it stacks up
Buffalo Wild Wings isn't an inexpensive stock by any means, but as the old saying goes, "you get what you pay for." Some analysts gaze down upon the company's trailing P/E of 26 as too expensive. Personally, I see plenty of value, especially if you look at the other possible choices in the casual-dining sector.


Forward P/E

5-Year Projected Growth Rate


Buffalo Wild Wings 21.7 21% $72.1M / 0
BJ's Restaurants (Nasdaq: BJRI) 39.0 22% $53.2M / 0
Ruby Tuesday (NYSE: RT) 13.5 13% $8.2M / $290.9M
California Pizza Kitchen (Nasdaq: CPKI) 22.3 15% $4.8M / 0
DineEquity (NYSE: DIN) 13.7 11% $102.3M / $2.0B

You'll notice that BJ's Restaurants sports a higher projected growth rate, but also trades at a forward earnings multiple that's nearly twice that at Buffalo Wild Wings. Ruby Tuesday and DineEquity might seem cheap on an earnings basis if their massive debt piles didn't heavily weigh on investors' stomachs.

Likewise, California Pizza Kitchen may seem like an all-around nice value on paper, but it isn't even currently profitable on a 12-month trailing basis. B-Wild's projected growth rate above 20% compounded with a comparable forward P/E suddenly doesn't look that bad next to its peers.

How it could make you money
Buffalo Wild Wings may want to consider sending Smithfield Foods (NYSE: SFD) a gift basket, because Smithfield's quarterly report last week indicated there could be a sharp rise in pork prices. The average American consumes 60 pounds of chicken a year, and as pork prices rise, this figure could go even higher. Luckily for Buffalo Wild Wings, chicken is its main product. Without large gyrations in the price of chicken, Buffalo Wild Wings should not have to raise menu prices, which should in turn help attract and retain customers, improving its recently subdued same-store sales figures.

It has cash -- and lots of it! The company's nearly $4 in per-share cash provides it with the financial flexibility to expand more quickly than its competitors. It's no surprise that it expanded by adding 80 additional restaurants last year, unit growth of 12%. More importantly, the company generated nearly $90 million in cash flow from operations in 2010 and didn't have to resort to diluting shareholders in order to grow. As long as its cash flow remains robust, I wouldn't rule out the possibility of a dividend down the road.

What are your thoughts on Buffalo Wild Wings? Do shares look delectable or are they simply too hot to handle at these prices? Share your thoughts below and consider tracking my 10 small caps to rule them all, as well as your own basket of stocks, with the free and easy-to-use My Watchlist.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.