Where Does Buffalo Wild Wings Go From Here?

A reader named Hayward writes:"

Chad, how about a new update on BWLD now that it exploded to the upside."

No problem, Hayward.

Sports bar and grill chain Buffalo Wild Wings (BWLD) is a stock I have been very bullish on for a long time. Hayward is referring to my post from eight months ago entitled A Wildly Bullish Quarter for Buffalo Wild Wings. The stock has since doubled to more than $42 per share.

The investment thesis was fairly simple back in October and nothing has changed on that end. This is still a popular concept restaurant with very strong growth prospects. BWLD has more than 400 locations with a large portion of them located in Ohio, the state where it was started years ago. With a long term target of 1,000 restaurants, there is enormous expansion potential and few barriers to get there.

The stock has had a huge run as the company trounced earnings estimates, which caused me to trim the position recently as it became a large holding and traded at 30 times next year's earnings. The stock is no longer cheap, but I still believe the stock will do well in coming years as they approach a national footprint.

I would suggest investors take some profits but still hold onto some of their stock. Since the store base can still more than double from here over the next five years, the stock should beat the market over that period, even if it isn't cheap anymore at this point in time. Right now Peridot is holding an average sized position in the name, whereas in prior months it was a larger position due to P/E multiple expansion potential (which has since occurred).

I hope that helps, Hayward. If anyone would like to suggest possible topics for future blog posts, feel free to let me know by using the blog's contact link at the top of the page.

Full Disclosure: Long shares of Buffalo Wild Wings at the time of writing

Kraft Shares Still Not Overly Attractive, Even After Altria Spin-Off Selling Pressure

With the Altria (MO) spin-off of Kraft Foods (KFT) completed on Monday, there has been renewed selling pressure on Kraft shares as investors shed their newly claimed small position in the company. Such negative price action will likely be a short term phenomenon, at least as far as it's relation to the spin-off, so a contrarian investor should be asking, "Is this near-term weakness an opportunity?" However, despite the poor performance, Kraft shares are not cheap.

At the recent price quote of $30 and change, they trade at 17 times 2007 profit forecasts. For a company that is growing sales at a low single digit rate annually, and whose earnings are projected to be flat between 2006 and 2008, the stock doesn't at all look like much of a value play, despite what the yield and the five year chart might have you believe.

The way I see it, not really. The one thing Kraft does have going for it is a fat 3.2% dividend yield, but other than that, there really isn't much to like. Buying a stock just for its dividend doesn't really make much sense when you can earn more in a savings account. As you can see from the five year chart below, Kraft shares have been underperforming the market for a long time, so bargain hunters may be drawn to the name.

Full Disclosure: No position in KFT at time of writing

The Power of Multiple Expansion

Stock prices go up for one of two reasons; earnings growth or multiple expansion. If you really want to hit the jackpot with your investments, try and find stocks that can give you both. The combination of the two, as I will illustrate in a moment, is really powerful in terms of shareholder returns.

This is one of the many reasons why value investing has proven to be so successful over time. By buying stocks that have meager valuations, there is always the potential for multiple expansion. Getting earnings growth is even easier because most economies grow over time, so as long as management teams do a good job, earnings growth is inevitable over the long term.

Last year a friend of mine emailed me about a stock he was looking at, beverage giant Diageo (DEO). Diageo is one of the biggest wine, spirits, and beer suppliers in the world, known for brands such as Smirnoff, Guinness, Baileys, Captain Morgan, and Tanqueray. At the time (perhaps about a year ago or so) DEO shares were trading in the low sixties and the company was expected to earn about $4 per share in the coming year. At about fifteen times forward earnings the stock looked pretty fairly valued to me. Given DEO's size and an organic revenue growth rate of about 6 percent, earnings growth would likely average mid to high single digits, so a fifteen multiple seemed reasonable.

I can't remember exactly what my response to him was, but I suspect my feelings on the stock were something like "yeah, it's a solid defensive play with a nice dividend yield, but it looks fairly priced, so I would expect the stock to pretty much track earnings growth." Well, that assessment turned out to be quite wrong. The stock has risen by more than 30 percent since then, to the low 80's.

So what the heck happened? Simply put, most of the gain came from multiple expansion. Beverage stocks have had a great run lately as they offer fairly predictable profits and nice dividend yields (just look at the charts for BUD, KO, and TAP). Defensive investors have placed a higher value on these stocks lately, and their stocks, which used to fetch market multiple of 14-16 times earnings are now getting 17-19 times earnings. Sales growth is still mid single digits, with earnings ranging from the high single digits to low double digits, but the stocks are seen as safe, and as markets rise, some investors look to put money in less aggressive places.

How much of DEO's gain was due to multiple expansion? Well, they earned $4 per share in 2006 and the stock went from a 15 P/E to an 18 P/E, so that is $12 per share in appreciation due to a higher multiple. That amounts to about a 20 percent share price jump (given that the stock was around $60 per share). Add in another 10 percent or so for earnings growth and you get a stock that is up 30 percent in the last year.

I might have been wrong about Diageo, but this should help to explain why valuation is so important when investing in the stock market. Diageo's business hasn't really changed much at all in the last year, but investors' willingness to pay up for the stock has, quite meaningfully in fact. And that, you see, is the power of multiple expansion.

Full Disclosure: No position in DEO at the time of writing

Altria to Spin Off Kraft... Shocking!

It's amazing how many people have been quoted saying the Altria (MO) spin-off of its 89% ownership of Kraft Foods (KFT) will send the shares of MO to between $100 and $110 each. If we've known about the spin-off forever (we have, even though the exact date was just announced) why has the stock been trading in the mid 80's? I guess I'm just not convinced that something like a spin-off, that surprised absolutely no one, will result in a 20% move in the shares of a company that, let's face it, makes cigarettes.

Altria shares, ex-Kraft, trade at about 15 times 2007 earnings. Is this a bargain for the leading maker of so-called "cancer sticks?" Doesn't seem to be. How much will investors be willing to pay for a company that sells a product that kills people and is hardly a rapidly growing market opportunity? Although the decline won't be as rapid as many of us would like, I have to think that over the long term the number of people who smoke will go down, not up.

For this reason, shares of cigarette firms, including MO, traditionally have traded at a discount to the market. With shares of Altria trading at about a market multiple, it's hard for me to understand why the actual spin-off of Kraft will cause a huge stock price spike. Such a move would require either 1) investors paying an above-average multiple for a business with a below-average growth rate, or 2) a dramatic increase in future earnings due to the financials flexibility that the spin-off provides.

The latter seems more likely than the former, but I still think Altria shares are fairly valued at current prices. In fact, it's interesting to note that MO stock has actually dropped from above $87 to $85 since the company announced the details of the Kraft spin-off. The stock remains an excellent dividend play, but investors expecting an immediate move up to $100 or more might have to wait a little longer than some are predicting.

Full Disclosure: No position in MO

A Wildly Bullish Quarter for Buffalo Wild Wings

Sports bar/restaurant chain Buffalo Wild Wings (BWLD) posted an excellent third quarter Tuesday evening, prompting a five point rise in its stock in extended hours trading. Sales jumped 32 percent to $68.3 million, ahead of estimates of $64.9 million, as company-owned same-store sales soared an astounding 11.8 percent. Earnings hit $0.40 per share, nearly 30% above estimates of $0.31 for the period.

The company's conference call was very bullish, as management laid out growth plans for the next three years. BWLD expects annual unit growth of 15 percent, sales growth of at least 20 percent, and earnings growth of at least 25 percent.

Also worth mentioning was the lack of fourth quarter guidance. The company announced that it has decided to abandon giving quarterly financial projections, due mostly to the fact that they have been quite unsuccessful at the task in the past, and with fewer than nine million shares outstanding, a miss or beat of a mere penny per share equates to only a $44,000 difference.

The bears on the stock (and there are plenty of them, as seen by the 18% short interest in the name) will point to the lack of guidance for the fourth quarter as evidence that management expects poor results relative to the market's expectations. However, such a conclusion isn't very likely. Management mentioned on the conference call that Q4 same-store sales are already tracking up 11 percent year-over-year, well above even the most bullish estimates on the Street. Even if fourth quarter results get no bump up from current analyst projections of $0.46 per share, the company will report $1.54 in EPS for 2006. A twenty-five percent jump in 2007 puts EPS for next year at $1.93 per share.

As I have written before, I don't care much at all for quarterly sales and earnings guidance. In the case of BWLD, the company has a growth plan in place that will take form over the next three to five years and beyond. Whether they open a new store in Q3 or Q4 should be irrelevant for long term investors. Investors in the stock, myself and my clients included, will be served quite well if the company hits its growth targets, regardless of how volatile the quarterly fluctuations in financial results turn out to be.

Full Disclosure: I own shares of Buffalo Wild Wings (BWLD) personally, as do my clients. 

Lampert/Anheuser Busch Rumors Insane

Have a flat-lined stock like Gap Stores (GPS) or Home Depot (HD)? Why not start a rumor that Eddie Lampert, Chairman of Sears Holdings and general partner of ESL Investments, a Connecticut based hedge fund, is interested in your stock? That seems to be a recurring idea on Wall Street lately.

The latest rumor sent shares of St. Louis based beer brewer Anheuser Busch (BUD) up 2 percent on Tuesday, on reports that Lampert could launch a $56 per share takeover bid. This has to be one of the silliest rumors I've ever heard. At least GPS or HD made a little sense given Lampert's taste for retailers, even though Home Depot is far too big for an outright acquisition.

How exactly could Lampert pay $44 billion for BUD? And even if he did have the money, why would he do such a thing? Maybe those starting these rumors just want the Warren Buffett/Eddie Lampert comparison to ring true. After all, Berkshire Hathaway (BRKA) has a fairly large position in BUD. Regardless of who is responsible for the rumors, please do not buy BUD shares on hopes of this news materializing. There is no way Lampert buys out Anheuser Busch.

Buffett Record is One Thing, Outlook Quite Another

Before you go out and buy a stock simply because Warren Buffett either has owned it for a long time or recently purchased it, consider the following quote from his letter to shareholders, released yesterday."

Expect no miracles from our equity portfolio. Though we own major interests of a number of strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they may double in value in ten years. The likelihood is that their per-share earnings, in aggregate, will grow 6-8% per year over the decade and that their stock prices will more or less match that growth."

What should investors gleam from this statement? Should they take it at face value, or just assume Buffett is being modest and trying to keep expectations low so he can exceed them more easily? If you are one of the many people who have asked me about my views on some of his larger holdings in recent months, you already know where I stand on this issue. Take what Buffett says as the truth. His days of drastic outperformance are long over.

Consider Berkshire Hathaway's performance in 2005; up 6 percent using the metric Buffett prefers. That compares with 5% for the S&P 500 with dividends reinvested. A solid year, but hardly something that one should bend over backwards to mimic. It also is right around the 7% estimated growth rate he offered in his letter.

Consider Berkshire's largest holding as of December 31st; more than $8 billion dollars of Coca Cola (KO). Coke stock has been dead money for 10 years, even as the S&P 500 has nearly doubled, as the chart below shows.

I will repeat here what I have told those who have asked. I would not expect shares of Berkshire, or Coca Cola, or Anheuser-Busch, or Wal-Mart, or Proctor & Gamble, or Washington Post, or any of Buffet's other large holdings to make you rich from here on out. They were all great buys at some point in time, say 15 or 20 years ago, but now they are richly priced, even as growth prospects have diminished greatly as they have grown into industry behemoths.

Why then does Buffett continue to hold these stocks, even if he only expects them to return 7% per year? The answer lies in the fact that he has said his ideal holding period for a stock is "forever." If I was to argue with Buffett on one aspect of his investment philosophy, that would most likely be the one I would choose. Holding a stock "forever" will ensure you own it during both the good times and the bad times. The latter is something investors should strive to avoid.

Grocery Shopping At Walmart

The large grocery store chains used to have virtual monopolies on food shoppers' wallets. However, over the last five years their fortunes have changed, and their stock prices have lagged. The pressure has come from a two-pronged attack, discounters and healthier food stores. Walmart mostly and Target to some degree in the former group, and the likes of Whole Foods and Trader Joe's in the latter group.

Some of the traditional grocery stores have seen the light and are attempting to shift their store offerings to be more like a Whole Foods. Safeway, for instance, has begun a remodeling campaign under the "Lifestyle" concept to regain some of the market share it has lost in recent years. Time will tell if the move works, but at least they are trying, so their odds are far better than those simply muddling along with razor thin margins and no plan to at least maintain the business they have.

This weekend I shopped at Walmart for groceries for the first time. That was a big step for me. I hate shopping at Walmart. I find their stores a miserable experience. While the prices are low, the departments aren't well organized and much of the shelves look like they haven't been restocked in weeks. More times than with any other store, I can wander around for 5 or 10 minutes looking for the aisle I need. This is a sharp contrast to Target stores, which I find to be fully stocked and very easy to navigate.

Anyway, back to Walmart and groceries. I usually visit the local grocery store, more out of convenience than anything else. However, I finally bit the bullet and realized I could save some decent money in Walmart's grocery aisles. After a successful trip, I came home and compared Walmart's prices to those I paid during my last trip to the local grocery chain. I wanted to know how much the savings really amounted to. Turns out, Walmart's regular prices are 30% below my neighborhood grocery store. Even when you factor in the local grocer's sale prices, Walmart still saved me 20%.

While I still prefer to go elsewhere, I will be making more trips to Walmart for staple items that I know I can save a good amount of money on. For me, that seems to be groceries and toiletries. With Walmart continuing to expand their food selection and Whole Foods and Trader Joe's growing their store bases at 20% annual rates, the traditional grocery chains better adjust, as Safeway is attempting to do, or else they will become extinct fairly quickly.

Whole Foods Reacts Poorly To Results

I feel for shareholders of Whole Foods Markets (WFMI). Yesterday the company reported 20% growth for yet another quarter and boosted its 2010 revenue goal to $12 billion from $10 billion. In a bid to please shareholders, the company also announced a $4 special dividend, a regular dividend increase of 30%, a two-for-one stock split, and a $200 million stock buyback plan.

Getting all four of those surely sounds like a good thing, but WFMI shares are down $9 in pre-market trading. The reason is quite simple. Whole Foods is a very high multiple stock and Q3 earnings didn't come in ahead of estimates, which many were banking on. Despite a growth forecast of 20% annual growth through 2010, the stock is under pressure.

This is undoubtedly due to the stock's high P/E. The company should earn about $3 next year, but that equates to a price-to-earnings ratio of 48 before today's drop. You'll be hard-pressed to find many investors who are willing to pay more than that for a stock, even if WFMI's outlook is very bright and the company can deliver on its growth goals.

What Happened To Buffett's Budweiser Stake?

Berkshire Hathaway (BRKA) filed with the SEC on August 15th and listed its current public stock holdings as of June 30th. Interestingly, there was a notable name absent from the list; Anheiser Busch (BUD).

Now, you may recall BUD came out in late April and said it had learned that Berkshire, Buffett's holding company, had taken a meaningful stake in it. The stock reacted by jumping $3 to $48 on the news, and many investors bought BUD shares simply because Buffett did.

The question I have is, how come recent SEC filings show no such stake in the beer giant?