Buffalo Wild Wings BWLD is due to report Q3 earnings 27-Oct-08 – 3-Nov-08. Fear is griping the market and pundits reasoning that the first place consumers will cut back is discretionary spending and in particular eating out. So why is BWLD still trading at a premium? BWLD has had a volatile year, but it has bucked the downward trend among restaurants this year. “Dow Jones U.S. Restaurants and Bars Index, stocks dipped about 1.1 percent during the quarter ended Sept. 30. The index, which is made 15 restaurant companies, has dropped nearly 11 percent in the past 52 weeks.” from AP

It would seem this Motley Fool Hidden Gems (HG) darling has had it wings clipped recently by the HG team.

Snapshot

The following chart courtesy of Big Charts shows the P/E ratio is around its mean for BWLD.

Why Sell

• BWLD is fairly priced. There are better opportunities in this market.
• Restaurants are likely to face stiff headwinds over the coming couple of quarters. While this has been priced in to other restaurants BWLD has largely been bucking the trend.
• Buying Put options for downside protection is too expensive. The Nov $40 have an implied volatility of 79.97% and the $35 Puts are 86.50%. A high IV means you paying a high price.

Alternatives

Sell Calls – this will provide some cash and is often considered a downside cushion. TMF poster captainccs explores selling Calls.

Speed Analysis

Q3’s consensus earnings are $0.31 with a range of $0.27-.35.  2008 and 09 earnings of 1.42 and 1.73 show analysts are still expecting 29% and 21% growth respectively over 2007 eps of $1.10. Five year earnings growth remains a heady 24%.

Now take a look at their past earnings growth, achieved while the going has been good. A less than stellar average of 18% or 21% if I go back one quarter further and include the bust out Q4 2003. Perhaps BWLD are just hitting their straps. Maybe to drench their misery people will flock to BWLD restaurants for beer and free TV. What are their margins on alcohol?



While earnings are not cash, this speed analysis makes me wonder whether expectations are still too high. One misstep over the coming quarters and a P/E in the low 20s is certainly possible. That is a lot of potential downside on a volatile stock.

NOTE: I am long BWLD and as yet am undecided on my course of action, but may have changed my position by the time you read this.

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