It is easy to write about Buffalo Wild Wings than to write about companies like Twitter and Yelp as the social media business is valued more on the growth side and a business like Buffalo Wild Wings has more predictable cash flow and earnings relatively speaking.
Stocks like Buffalo Wild Wings (such as Jack, CMG, DPZ) has all outperformed the broader market over the past few years and while sales and revenues are getting better each year, so is the multiples. Today, I am just showing a simple DCF analysis with the business and hopefully it gives you an idea if you are holding or planning to buy the stock in the future.
In summary, this DCF analysis uses the EBIDTA multiple as the terminal value (with implied growth rate) along with the NPV of the next five years free cash flow to arrive the Enterprise Value. In the year of 2014, the company had sales just over 1.5 billion, representing a 19.70% increase over the year of 2013. From 2015 to 2019, I projected a growth rate gradually falling from 17% to 8% and as a result, sales would reach just over 2.7 billion at the end of the year 2019. Assuming the company maintains an average operating margin of 8.95%, earnings before interest and taxes would reach about 242 million.
From the annual report, we get the tax rate about 30%. After taxes, D&A was added, we then subtract each year's projected Cap-ex (5% increase each year in the next five years) and change in operating assets. In here, we projected the change in operating assets as a percentage of sales each year and the change each year go up slighted give the projected revenue growth. See a screen shot below for the unlevered Free Cash Flow (in thousands)
To get the Net present value, I did an estimation of the company's WACC. As the company currently has no debt, I am using the CAPM for the cost of equity. The assumptions are:
- 10-year treasure yield as risk free rate
- Risk premium 7.5%
- Beta of 1.51 from Yahoo Finance
As a result, the WACC comes to be about 13.33% and the NPV of the free cash flow up to the year of 2019 discounted with WACC comes to approximately 396,625,000.
Next, EBIDTA at the end of 2019 was estimated based on about 15% of sales as this is what the company had in average over the past few years. Two multiples were selected and adjusted here to reflect a more reasonable implied growth rate. As shown in the spreadsheet, a 9.5x and 12x multiple representing a 2.53% and 4.61% growth rate in perpetuity. Please note that as the company had a negative net debt position (debt obligation - cash), its equity value turns out to be slightly higher than the enterprise value(NYSE:EV). Under two different scenarios, the fair share value is $137.92 given a 9.5x multiple and $167.43 given a 12x multiple.
Please do keep in mind that this DCF analysis involves many assumptions and forecasts and did not take into account other factors that could simply change how the company is valued by investors. An important key driver for business like Buffalo Wild Wings is always the same store sales growth. If in the future, the company can find a way to maintain and accelerate its same store growth rate, investors will not hesitate to pay a premium for the superior growth over its competitors.
The bottom line is that the stock currently looks fairly valued and definitely is not attractive to me given the closing price of $156.99 as of May 5th, 2015. This is also because we could possibly see a rising short term interest rate in September and everyone now (including me) has been waiting for a correction for the market so that it gives us a better chance to buy some high quality stocks.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.