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.
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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.
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.