Published: April 14, 2008

According to lore, or at least the back of the menu, Buffalo Wild Wings (Nasdaq: BWLD, $24.09) started out as little more than a dream for two transplanted Buffalo residents living in Ohio. The pair began selling their beloved hot wings to Ohio State University students in 1982, and the concept quickly spread to more than 35 states throughout the country. A few weeks ago, the company opened its 500th location.

Along the way, sales have more than doubled over the past five years to reach $330 million, while profits have risen +300% to $20 million, or $1.10 per share.

Today, Buffalo Wild Wings serves up mountains of wings spun in one of 14 signature sauces, along with burgers, ribs, nachos and other pub fare. And patrons can wash it all down with a wide selection of more than 20 rotating beers on tap. However, it's not just the company's food and drink that keeps loyal customers coming back time after time, but the atmosphere.

Each location is filled with wall-sized flat screen televisions and monitors -- a dream for any sports fan looking for a place to watch the big game. The restaurants are also connected to the NTN Network, a highly addictive trivia game that draws in a devoted crowd and keeps most players sticking around.

According to the firm's public relations department, Buffalo Wild Wings has been handed hundreds of "Best Sports Bar" awards nationwide -- a testament to its popularity as a gathering spot.

In February, the company outlined ambitious goals for fiscal 2008: a +15% increase in restaurant units, a +20% improvement in revenues, and a +25% jump in net income. And there's little reason to believe management can't hit those targets. But that could be just the beginning; eventually the firm plans to double its store base to more than 1,000 units.

And consider this: Buffalo Wild Wings has posted positive same-store sales for 19 consecutive quarters and has an eight-year streak of increasing average weekly sales volume. The average company-owned store is now raking in revenues approaching $40,000 per week.

Along with the rest of the industry, shares of BWLD have been under pressure lately, slipping from $40 in October to a current price of $24.09. Rising costs can be blamed for part of the decline, as chicken wing prices hit $1.24 per pound last quarter -- up from an average of $1.17 in 2006. And in recent months, the spot market price had climbed above $1.55 per pound. Fortunately, rates have backed off considerably since then, to as low as $1.28 in mid-March. And the timing of that pullback was fortuitous, considering the company's long-term supply contract happened to expire last month.

Based in part on steady same-store sales growth and with BWLD steadily expanding its footprint into untapped markets (at the current ratio of 1/3 company-owned locations and 2/3 franchised), I have calculated a fair value of $38 per share -- right where the stock was trading before the bottom fell out of the market.

Should the stock re-take that summit, investors will enjoy spicy gains of around +58%.

It may be a little too early to sound the "all-clear," and a protracted economic slump could keep the shares languishing for a while. However, I believe much of the weakness is already priced in at this point, and I think investors who take advantage will ultimately see above-average gains.
 

Nathan Slaughter
Editor
Half-Priced Stocks

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About Nathan Slaughter

Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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