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Buffalo Wild Wings (BWLD) is a restaurant chain that offers casual dining with a full (sports) bar. It is usually set in a suburban or rural environment. As of the time of writing, Buffalo Wild Wings had 817 restaurants, of which 319 were company-owned, while 498 were franchised. In 2012, it plans to open 90 new restaurants (11% growth). In its annual report, Buffalo Wild Wings claims the United States market can support more than 1,000 of its restaurant concepts.

Click to enlarge

As shown in the table, Buffalo Wild Wings' restaurant-opening speed has slowed down a little over the past two years, dropping from 15%-20% per year to 12% per year. It is also moving towards having more company-owned rather than franchise restaurants, making it more similar to other non-fast-food restaurant chains like Darden Restaurants (DRI). Each Buffalo Wild Wings company-owned restaurant had sales of about $2.25 million in 2011, with a per restaurant sales growth of roughly 5%. Amazingly, chicken wings accounted for 41% of the sales at Buffalo Wild Wings restaurants.

Owned

Growth

Franchised

Growth

Total

Growth

2011

319

23%

498

5%

817

12%

2010

259

12%

473

13%

732

12%

2009

232

18%

420

16%

652

16%

2008

197

22%

363

9%

560

14%

2007

161

16%

332

14%

493

15%

2006

139

14%

290

17%

429

16%

2005

122

18%

248

22%

370

21%

2004

103

203

306

New restaurant opening (11%) and sales growth (5%) combined gives Buffalo Wild Wings 15% growth in revenue each year. Comparing to non-franchise restaurants such as Darden or PF Chang's (PFCB), the optimistic picture is to assume that Buffalo Wild Wings' operating margin stays between 9%-10% (close to Buffalo Wild Wings historical highs).

Starting with the current operating cash flow of $148.26 million, using a 15% growth projection for the next three years, Buffalo Wild Wings' projected operating cash flow is $225 million. Using a relatively conservative price/operating cash flow ratio of 10, this gives Buffalo Wild Wings a market cap of $2.25 billion in three years. In turn, it represents an annual return of roughly 10% from the current market cap of $1.71 billion. This is a reasonable return, but doesn't leave much for margin of safety.

The possible risks in taking positions:

1. Stagnant or no growth in restaurant-opening. This is very unlikely unless the market condition suddenly deteriorates and its margin drops sharply. I cannot see such trend based on recent financial records.

2. Same restaurant sales growth stops. This removes about 5% from the growth rate. The valuation under this condition gives 5% annual returns.

The verdict: Buffalo Wild Wings is fairly valued. It, however, does not leave a lot of margin of safety. If opportunities come up, buy on a dip.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Buffalo Wild Wings: A Solid Growth Company To Buy On A Dip