Options Trade – Buffalo Wild Wings (BWLD) 
Friday, January 24, 2013

BWLD - Diversification, Growth, Stability And Dividends!

**OPTION TRADE: Buy the BWLD Jun 2013 80.000 call (BWLD130622C00080000) at or under $5.20, good for the day. Place a protective stop limit at $3.00 and a pre-determined sell at $8.50.

by Ian Harvey

January 24, 2013

Introduction

Just in time for the Super Bowl, Buffalo Wild Wings (NASDAQ: BWLD) has come to the fore — and it looks to be setting up for a nice juicy risk/reward.

It has components that are certainly acceptable – diversification, growth and sufficient stability and dividends to offset potential market losses.

Business Summary

Buffalo Wild Wings, Inc. is an owner, operator and franchisor of restaurants featuring a variety of menu items, including its Buffalo, New York-style chicken wings spun in any of its 14 signature sauces or four signature seasonings.

Its restaurants create an atmosphere that includes a multi-media system, a full bar and an open layout, which appeals to sports fans and families alike. Its guests have the option of watching sporting events or other programs on its projection screens and approximately 50 additional televisions, competing in Buzztime Trivia, or playing video games.

The open layout of its restaurants offers dining and bar areas that provide seating choices for sports fans and families. Its menu features traditional chicken wings, boneless wings, and other items, including chicken tenders, Wild Flatbreads, popcorn shrimp, specialty hamburgers and sandwiches, wraps, Buffalito soft tacos, appetizers and salads.

There are more than 850 Buffalo Wild Wings locations across 48 states in the United States, as well as in Canada. Buffalo Wild Wings was founded in 1982, and the company has achieved tremendous growth since its IPO in 2003, with shares soaring more than sevenfold over these years. The company has posted 20%+ growth in terms of revenue as well as earnings over the past 5 years.

From a longer-term perspective: Looking back to its late-2008 lows, BWLD stock remains in its uptrend. However, it rallied sharply in early 2012 and, as a result, broke out of this longer-term uptrending channel with this almost vertical leap. By mid-2012, BWLD had mean-reversed back into the longer-term trend, and it currently sits in the lower end of this uptrend.

A little more medium-term, we find Buffalo Wild Wings has a price level that it acts well around. Since summer 2011, BWLD has continually found resistance as well as support around the $70 mark; the level acted as resistance until early 2012 and acted as support ever since.

To be exact, the stock has now bounced off the $70 mark three times since mid-2012; the latest of these bounces occurred in late December 2012 and gets us to the current setup in the stock.

If we look even closer, we see that after the bounce off $70 in late December, BWLD rallied into a resistance level dating back to November 2012, which also is capped by a looming gap. In other words, this confluence of sorts, lines up an area of resistance made up of three things: multi-month resistance, bottom of a down-gap from Oct. 24, and most recently the 100-day simple moving average.

Revenue

As shown in the chart above, Buffalo Wild Wings' revenue continues to climb rapidly and shows no signs of stopping. Also, same store sales comparisons are still in the mid-single digits, and they continue to open new stores across the U.S. They are also starting to expand internationally. However, the chart above shows that EPS growth has leveled off due to the aforementioned cost increases and a planned investment in technology infrastructure. This has caused Buffalo Wild Wings' PEG ratio to spike temporarily. All of these worries have sparked investor concerns and have kept the stock price down over the past year. This presents an opportunistic investment in Buffalo Wild Wings while the earnings are temporarily lower than usual. Expect this to be a good year for the company in light of its current valuation and future prospects.

After running into this resistance point, BWLD proceeded to retrace 61.8% of the late December/early January rally, which coincided with its 50-day moving average. So the stock is now stuck between its 50- and 100-day SMAs. On the day of finding support at the 61.8% Fibonacci retracement level, BWLD developed a hammer candle and pushed higher the next day with follow-through buying. This now sets the stock up for good risk/reward on the long side. Especially a break past medium-term resistance near $77 could push BWLD a good 8% higher toward $83, and hence a fill of the gap from Oct. 24.

Valuation

From a valuation standpoint, Buffalo Wild Wings is significantly undervalued. The company is trading at a forward PE of 20.75, compared to BJ’s Restaurants’ 25.44 and Chipotle’s 28.79. And interestingly, on a PEG basis, assuming a 20% long-term EPS growth rate (as per the consensus estimates for the next 5 year growth rate), shares are trading at ~1.18x, while both BJ’s Restaurants and Chipotle are trading close to ~1.6x. Thus, I see a significant upside potential in Buffalo Wild Wings' shares in the long run.

Earnings

Based on the third quarter earnings report of the company in October, Buffalo Wild Wings posted $246.9 million total revenue, 24.8% higher than its $197.8 million during the same period in 2011. The sales of its company owned restaurants rose by 26.2% to $228.4 million due to an additional 55 restaurants, and a 6.2 % increase in same store sales. The restaurant operator generated $18.4 million franchise fees and royalties, up from $16.7 million a year earlier. According to the company, its earnings per share decreased from $0.61 to $0.57 because of high cost of sales and preopening expenses.

According to Sally Smith, CEO of Buffalo Wild Wings, the company aims to deliver earnings growth of 22% for FY 2013. The CEO is confident that the implementation of innovations in food, beverage, technology, and an enhanced guest services strategy would drive the company’s revenue. Smith also anticipated the company’s expansion to 1,700 locations in North America and overseas.

In 2011, Buffalo Wild Wings sold more than 1 billion traditional, boneless wings. The company sells an average of 21 million wings every week. According to Sally Smith, during the Super Bowl Sunday in 2012 alone, the company sold around 7.7 million wings. She expects the company to sell more than 8 million wings during the Super Bowl as it added100 locations this year.

The stock value of BWLD surged during the Super Bowl by 21% and 30% in 2011 and 2012, respectively. Over the past three years, the company delivered 90.34% returns compared with the 37.39% posted by the S&P 500 and Chipotle Mexican Grill's (NYSE: CMG) 246.6% returns.

BWLD has 24% growth rate on EPS, 24.3% on EBITDA and 21.7% on revenue over the past five years. The company has zero long-term debt and $184 million total liabilities, which is lower than its $549.85 million total assets. Although the company’s revenue fluctuates due to the inflation of chicken wings (up by 40% in 5 years), BWLD maintained to report an increasing revenue and EPS over the years.

Analysts Outlook

Analysts expect BWLD to report $0.95 EPS for the December quarter on February 5, 2013. Among the 20 analysts covering the stock, 9 currently recommended buy, 2 overweight, 8 hold and 1 mean. The shares of BWLD are trading around $77.14 per share as of this writing.

Based on the BWLD Total Returns Comparison table above, Chipotle Mexican Grill delivered 246.6% total returns over the past three years. Take note that over the past one year, its performance was -14.15%, and its year-to-date (YTD) returns were only 0.72% compared with BWLD’s 5.29%.

Hedge Fund Confidence in BWLD

The billionaire investor, Steven Cohen, founder and CEO of SAC Capital Advisors, purchased an additional 926,700 shares of the company based on the latest 13 filing of his firm with the Securities and Exchange Commission (SEC).

SAC Capital Advisors currently owns 930,000 total shares or 5% stake in Buffalo Wild Wings. During the previous quarter, the hedge fund held only 3,900 shares of the company. Its latest acquisition showed that Cohen is confident that Buffalo Wild Wings is capable of delivering positive returns.

Other investors that held a large amount of shares of BWLD as September 30, 2012 include Tiger Consumer Management (848,314 shares), Vanguard Group (1,081,067 shares), Franklin Resources (1,092,375 shares), and FMR (1,274,526 shares).

Expansion

Chicken wing consumption peaks during Super Bowl weekend, but the dish has become increasingly popular year-round. Demand has been bolstered over the last decade by the rising number of restaurants with menus dedicated to wings or including them on the menu and BWLD is definitely positioned to take advantage of this.

The concept started in 1964 in Buffalo, New York, and has become a staple on menus. About 3.2 percent of all dinner orders in U.S. restaurants include wings, compared with 1.9 percent in 1995. Americans like finding new ways to eat chicken and wings offer an opportunity to explore new flavors through a familiar food.

Over the past five years, Buffalo Wild Wings continues to open more company-owned restaurants and franchised restaurants every quarter.

Due to this demand, BWLD anticipates increasing locations in North America to 1,000 by the end of this year, up from 876 company-owned and franchise restaurants, the Minneapolis-based chain said last month.

Buffalo Wild Wings has been a phenomenal growth story in the past, and I think the company still has significant room to grow domestically as well as internationally. The company seems poised to achieve substantial revenue growth with innovations in food, beverage, and an enhanced guest services strategy. The implementation of serving wings flexible portions across all locations and the new distribution contract will offset the inflation of chicken wings. After the recent weakness, the stock seems highly undervalued on a growth adjusted basis with respect to its peers.

Expect Buffalo Wild Wings to maintain its 10+% growth rate through at least 2015, driven by the combination of best-in-class new unit productivity, improving unit-level economics, and emerging international development prospects.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the BWLD Jun 2013 80.000 call (BWLD130622C00080000) at or under $5.20, good for the day. Place a protective stop limit at $3.00 and a pre-determined sell at $8.50.



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Options traders win because they are successful.



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