In other words, the recent 5% price decline is minor in comparison to where the company has historically traded. Now, this is not to suggest that the company's prospects are underwhelming -- quite the contrary. However, I would like to use this article to indicate what assumptions one is making when looking to initiate a partnership with Buffalo Wild Wings today.
Below I have included the Estimated Earnings and Return Calculator for Buffalo Wild Wings. It's important to underscore the idea that this is simply a calculator, but it does provide a solid baseline for how analysts are presently viewing the company.
Specifically, it indicates that 20 analysts reporting to Standard & Poor's Capital IQ come to consensus earnings estimates of $3.63 and $4.42 per share for the upcoming fiscal years, and an estimated earnings growth rate in the intermediate term of 20%. In addition, if these forecasts come to fruition and Buffalo Wild Wings trades at 20 times earnings, in five years this would indicate a 4.5% total estimated annual return.
Obviously a higher expected growth rate of P/E ratio would lead to a higher expected return, but it's important to remain prudent in these expectations.
For instance, while the company could grow faster than 20%, it certainly wouldn't be cautious to plan on 30% growth. After-all, the company was unable to do that in the last five years when it was much smaller and management has indicated a target growth rate goal of 20% for next year. Further, while a P/E near 40 in the future might indicate performance results that roughly tracked business results, this assumption certainly isn't erring on the side of caution.
Overall Buffalo Wild Wings appears to be a very strong, fast-growing company with great potential prospects. However, today's valuation leaves little in the way of a "margin of safety."
The company must grow quite fast -- by 20% or more -- and command a P/E ratio well above the market to make for a compelling investment. This is not to suggest that it can't happen, but rather to indicate that current prices reflect this significant growth expectation in the future. As always, I recommend that the reader conduct his or her own thorough due diligence.