The valuation on Buffalo Wild Wings (BWLD) shows just how irrational the market has become. Some companies have P/E ratios that are way higher than they should be, and stocks like Buffalo Wild Wings could be in for a fall if the market looses its luster.
BWLD had negative profit growth last quarter (-3%) as higher chicken wing costs and higher labor costs hurt profits despite a 20% rise in sales. Labor was partially hurt by BWLD expanding into areas with higher minimum wages. The company also missed estimates by 2 cents. Still — after all that — the stock went up and is now selling for 32x earnings despite management expecting just 18% profit growth in 2015.
The high valuation on BWLD makes me believe the stock market is overvalued. During the past seven years I’ve been bullish on the market because its been undervalued. But now the market’s high and many stocks are too high.
Just because stocks are overpriced or too high doesn’t mean they are due for a fall. That’s not how the market works. Things could stay this way for a while. The market need a catalyst — or a reason — to shift, like something to get worried about. Right now everything is fine. But something will eventually happen to shift the market, whether political or economical, and a correction with high P/Es could mean trouble for stocks that are overvalued like BWLD.
One Year Chart
So BWLD has a 32 P/E and is expected to grow profits 18% this year? That’s a high P/E, and is exactly why I sold the stock back in December. I had been a long-term holder of BWLD, covering it since its IPO and purchasing it 2/9/06 for $19. When I sold BWLD the stock was high at $170 and it’s $20 higher now.
Estimates show +9% and +15% profit growth coming up, and that’s a prime reason the P/E of 32 is in red. This stock is too high. Don’t you think?
Fair Value
Buffalo Wild Wings is a perennial 20% grower and since its so consistent with growing at 20% every year I think it’s worth 25x earnings which is still a rich valuation. My 2015 Fair Value on the stock is $150, which means BWLD is overvalued by 20%. In fact, I think the stock could be $180 next year, $10 lower than it is now.
Sharek’s Take
Buffalo Wild Wings is one of my favorite stocks of all time, but I see an overheated market right now and BWLD is just too hot to handle. I’ll look at reinvesting if or when the stock comes down to a more reasonable level.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
