In the past 30 days, three analysts have increased their earnings estimates for this year and next for this restaurant company.
Buffalo Wild Wings (BWLD)
From Validea Hot List Newsletter
Strategy: Patient Investor
Based on: Warren Buffett
Buffalo Wild Wings, Inc. (BWLD) restaurants feature various menu items, including its Buffalo, New York-style chicken wings spun in one of its signature sauces from sweet to screamin’ hot, which includes Sweet barbeque (BBQ), Teriyaki, Bourbon Honey Mustard, Mild, Parmesan Garlic, Medium, Honey BBQ, Spicy Garlic, Asian Zing, Caribbean Jerk, Thai Curry, Hot BBQ, Hot, Mango Habanero, Wild and Blazin’, or signature seasonings, Buffalo, Desert Heat, Chipotle BBQ, Lemon Pepper, and Salt & Vinegar. Its restaurants include a multi-media system, a bar and an open layout. It operates Buffalo Wild Wings, R Taco and PizzaRev restaurants, as well as sells Buffalo Wild Wings and R Taco restaurant franchises.
STAGE 1: “Is this a Buffett type company?”
A bedrock principle for Buffett is that his type of company has a “durable competitive advantage” as compared to being a “price competitive” or “commodity” type of business. Companies with a “durable competitive advantage” are more likely to be found in these sub-industries: Brand Name Fast Food Restaurants, Brand Name Beverages, Brand Name Foods, Brand Name Toiletries and Household Products, Brand Name Clothing, Brand Name Prescription Drugs, Advertising, Advertising Agencies, TV, Newspapers, Magazines, Direct Mail, Repetitive Services for Businesses, Low Cost Producers of Insurance, furniture, or Low Cost Retailers.
While you should be easily able to explain where the company’s pricing power comes from (i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn’t changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition), there are certain figures that one can look at that can qualify the company as having a durable competitive advantage.
EARNINGS PREDICTABILITY: PASS. Buffett would consider BWLD’s earnings predictable. In fact, EPS have increased every year. BWLD’s long term historical EPS growth rate is 17.4%, based on the average of the 3, 4 and 5 year historical eps growth rates.
THE ABILITY TO PAY OFF DEBT PASS: BWLD has a debt of 93.4 million and earnings of 99.9 million, which could be used to pay off the debt in less than two years, which is considered exceptional.
CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY: PASS: US corporations have, on average, returned about 12% on equity over the last 30 years. The average ROE for BWLD, over the last ten years, is 14.8%. Although he prefers ROE to be 15% or higher, this level is acceptable to Buffett. It is not enough that the average be at least 15%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROE must be at least 10% for Buffett to feel comfortable that the ROE is consistent. In addition, the average ROE over the last 3 years must also exceed 15%. The ROE for the last 10 years, from earliest to latest, is 13.7%, 13.7%, 14.2%, 14.5%, 14.9%, 15.8%, 14.9%, 15.3%, 16.4%, 14.3%, and the average ROE over the last 3 years is 15.3%, thus passing this criterion.
CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITAL: PASS: For non-financial companies Buffett requires that the average Return On Total Capital (ROTC) be at least 12% and consistent. In addition, the average ROTC over the last 3 years must also exceed 12%. The average ROTC for BWLD, over the last ten years, is 13.9% and the average ROTC over the past 3 years is 14.9%, which is high enough to pass. It is not enough that the average be at least 12%. For each of the last 10 years, with the possible exception of the last fiscal year, the ROTC must be at least 9% for Buffett to feel comfortable that the ROTC is consistent. The ROTC for the last 10 years, from earliest to latest, is 12.7%, 12.6%, 13.1%, 13.5%, 13.9%, 14.7%, 13.9%, 15.3%, 16.4%, 12.9%, thus passing this criterion.
CAPITAL EXPENDITURES: PASS: BWLD’s free cash flow per share of $3.38 is positive, indicating that the company is generating more cash that it is consuming.
MANAGEMENT’S USE OF RETAINED EARNINGS: PASS: BWLD’s management has proven it can earn shareholders a 15.2% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.
HAS THE COMPANY BEEN BUYING BACK SHARES: BONUS PASS: This indicates that management has been using excess capital to increase shareholder value. BWLD’s shares outstanding have fallen over the past five years from 18,379,999 to 18,000,000, thus passing this criterion.
STAGE 2: “Should I buy at this price?” Although a firm may be a Buffett type company, he won’t invest in it unless he can get a favorable price that allows him a great long term return.
COMPARE THE INITIAL RATE OF RETURN WITH THE LONG-TERM TREASURY YIELD: PASS: Buffett favors companies in which the initial rate of return is around the long-term treasury yield. Currently, the long-term treasury yield is about 2.25%. Compare this with BWLD’s initial yield of 3.54%, which will expand at an annual rate of 17.4%, based on the average of the 3, 4 and 5 year historical eps growth rates.
LOOK AT THE RANGE OF EXPECTED RATE OF RETURN: PASS: Based on two different methods (average ROE and average EPS), you could expect an annual compounding rate of return somewhere between 13.8% and 17.4%. To pinpoint the average return a little better, we have taken an average of the two different methods. Investors could expect an average return of 15.6% on BWLD stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, January 27, 2017