Buffalo Wild Wings (BWLD): Four Reasons To Not Play Chicken With This Stock

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Part of the reason that Buffalo Wild Wings isn’t retiring shares is because their margins have taken a serious hit in the last year or so. This is the third reason to avoid the shares, the company’s operating margin seems to get worse every quarter. Just for point of reference, Panera and Chipotle reported operating margins of 13.58% and 13.4% respectively. Brinker International, Inc. (NYSE:EAT) is more of a standard sit-down restaurant chain, but still reported an operating margin of 10.68%.

By comparison, Buffalo Wild Wings (NASDAQ:BWLD) reported an operating margin of just 7.2% in the last three months. This could be seen as an opportunity, except this number is getting worse. A year ago, the company’s operating margin was 10.68%, last quarter it came in at 7.7%. To see a company’s margin reduced by over 30% in a year means there is a serious problem. The problem is, the company’s narrowly focused menu of chicken wings hurts the bottom line. The company must expand its menu if it wants to address this issue.

Last but not least, Buffalo Wild Wings (NASDAQ:BWLD)’ lower margins are leading to either negative or barely positive free cash flow. I use a measure I call core free cash flow, which eliminates the accounting changes to assets and liabilities on the cash flow statement. Core free cash flow is net income, plus depreciation, minus capital expenditures. Buffalo Wild Wings core free cash flow was negative last quarter, and just $747,000 positive in the current quarter. For a company with over $300 million in sales, this is far too little. Considering that all of their peers generate positive core free cash flow, this is yet another challenge for the company.

In the end, Buffalo Wild Wings (NASDAQ:BWLD) is expected to grow EPS by over 19%, but so are Panera Bread Co (NASDAQ:PNRA) and Chipotle. While Chipotle is a bit expensive at over 35 times forward projections, Panera sells for nearly the same multiple as Buffalo Wild Wings, yet is a far more consistent performer. For investors who want yield, Brinker International, Inc. (NYSE:EAT) offers a better than 2% yield, and a side of 14% expected earnings growth. With other companies offering much more tasty results, I wouldn’t play chicken with Buffalo Wild Wings stock.

The article 4 Reasons To Not Play Chicken With This Stock originally appeared on Fool.com and is written by Chad Henage.

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