3 Retail And Restaurant Stocks To Feast On

Includes: BWLD, CMG, RUE
by: Dustin Small

Over the past couple of weeks, I have spent a fair amount of time reviewing my past picks and updating valuations. I use a value based approach to investing, whereby stocks are purchased (ideally) at much less than their intrinsic value. The retail and restaurant industries are two that I like to focus on, and there are three in particular that I follow very closely. We will look at each of these below.

Chipotle Mexican Grill (NYSE:CMG)

CMG is an owner and operator of Mexican fast food restaurants, which have a core menu consisting of burritos, tacos, and salads. The company has been extremely successful over the past few years, and the stock price has increased accordingly. It's a great company. But is it great value? Let's take a look at some of the highlights:

  • EPS Growth (past 5 years): 39%
  • Revenue Growth (past 5 years: 23%
  • Over 150 restaurants opened in 2012
  • Plan to open a further 165 restaurants in 2013
  • Zero long-term debt
  • Aggressive stock repurchase plan in effect

I forecast that EPS growth will continue at a rate of 22% over the next five years, and that PE will drop to around 25. Using an EPS growth capitalization method, I value CMG currently at around $297/share. Recently, Chipotle has been trading at around $300, which leads me to conclude that the company is fairly valued at this time. To allow for a margin of safety in my valuation, I would seek to enter at a price of $250 at most.

Buffalo Wild Wings (NASDAQ:BWLD)

BWLD is an owner, operator, and franchiser of sports pubs specializing in one of America's favorite foods: chicken wings and beer. The company has been extremely successful in marrying sports bar and family restaurant and caters to both crowds alike. The company has grown fantastically since its inception back in the 80's and is opening new stores at breakneck pace. Some of the highlights of the company are as follows:

  • EPS Growth (past 5 years): 24%
  • Revenue Growth (past 5 years): 23%
  • Hurt recently by skyrocketing chicken prices
  • Plans to open 60 company owned and 45 franchised restaurants in 2013
  • Close to hitting the 1000 restaurant mark, but sees the potential for 1700 stores in North America alone

The raw material cost of chicken is an important factor for the company, since it represents over 25% of the cost of goods sold, and is hurting the company's bottom line. Despite that fact though, BWLD is still on track for a strong year, and while I have revised my growth estimates lower, I am still confident in this company going forward.

Using a future EPS growth rate of 19% and a PE of 23, I estimate that BWLD is currently valued at $79.48/share. Recently, BWLD has been trading circa $75 - $77/share, indicating that it is slightly undervalued at this time. I would seek to enter in the $65 - $70 price range.

Rue21, Inc. (NASDAQ:RUE)

As my favorite retailer at the moment, Rue21 is one that I keep a very close eye on. Although it's only been trading publicly for a few years, it has done extremely well, has zero long-term debt, and is experiencing a high rate of growth. Some key items to note are:

  • EPS Growth (past 4 years): 34%
  • Revenue Growth (past 4 years): 27%
  • Zero long-term debt
  • Niche player in small towns to avoid competing against the big brands
  • Attacking growth on multiple fronts: Same store sales, new stores, and remodeling stores with an increased emphasis on high margin items
  • Focused on teen market, which can be fickle

I don't believe the 34% growth rate the company is experiencing currently is sustainable, and instead predict a rate of 19% moving forward. This is in line with analyst estimates. A PE ratio of 20 is reasonable based on historical numbers. This results in an intrinsic value by my calculation of around $39.50/share. As of Friday, RUE was trading at $29, indicating that this company is greatly undervalued at these levels. I am a buyer at this price.

Disclosure: I am long RUE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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