The most recent 10-Q, for the fiscal quarter ending in September 2012, showed revenue increasing 25% over a year earlier. However, earnings were actually down slightly as costs rose, notably restaurant operating costs; the company noted that the average price per pound for chicken wings was considerably higher than it had been. In addition, revenue growth had been primarily due to the opening of new locations; same-store sales were up only about 6%. Net income was still up for the fiscal year, though the growth rate of 9% was fairly low relative to the fact that Buffalo Wild Wings currently trades at 25 times trailing earnings and of course there is the point that growth on the bottom line is likely slowing.
Chicken prices probably won’t continue increasing as much as they have, and Buffalo Wild Wings likely still has plenty of latitude to add new locations. The same-store sales aren’t particularly high- particularly if the company was making an effort to pass on higher costs- but we can assume that the new locations will tend to add earnings. Still, the forward P/E of 20 makes it hard to call the stock undervalued.
A few new hedge fund positions- including that of SAC- allowed Buffalo Wild Wings to make it onto our list of the most popular restaurant stocks among hedge funds for the third quarter (see the top ten list). The largest position among the funds and other notable investors we track in our database of 13F filings belonged to Tiger Consumer Management. That fund, managed by Tiger Cub Patrick McCormack, reported owning about 850,000 shares (check out more of McCormack’s stock picks). We would note that while Cohen and some other fund managers like the stock, a sizable share of the market apparently thinks it’s overvalued: the most recent data shows that 23% of the outstanding shares are held short.
Does it make sense to buy Buffalo Wild Wings compared to other restaurants?
Peers for Buffalo Wild Wings include growth players Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA) as well as table-service restaurants offering a similar experience; we’d particularly consider DineEquity Inc (NYSE:DIN), which owns Applebee’s, and Brinker International, Inc. (NYSE:EAT), which primarily operates and franchises Chili’s restaurants. Panera and Chipotle have even higher forward multiples than Buffalo Wild Wings, with Chipotle’s in particular close to 30. Of course, these two companies reported earnings growth of 20% in Chipotle’s case and 27% in Panera’s case for their most recent quarter compared to the same period in the previous year. While we’re wary of the valuations of these quick service restaurants, we think that the combination of valuation and growth they offer is substantially better than where Buffalo Wild Wings is. The full-service restaurants, meanwhile, carry discount to Buffalo Wild Wings in terms of their P/E multiples. Brinker in particular is valued at 16 times its trailing earnings and only 12 times its forward earnings estimates. It reported substantially higher net income last quarter than a year earlier, though revenue growth was limited.
We don’t think that this is a good hedge fund move for investors to follow. Buffalo Wild Wings has growth potential, but the valuation is expensive enough that it trades close to Panera and Chipotle- where the question is not one of growth potential but one of how long the company can continue what has been a pattern of high earnings growth. We’d avoid those two stocks, and so it’s an even worse idea from our perspective to buy Buffalo Wild Wings.
