Has Buffalo Wild Wings Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Buffalo Wild Wings (NAS: BWLD) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Buffalo Wild Wings.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.8% Pass
  1-Year Revenue Growth > 12% 32.7% Pass
Margins Gross Margin > 35% 26.3% Fail
  Net Margin > 15% 6.3% Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 1.42 Pass
Opportunities Return on Equity > 15% 17.7% Pass
Valuation Normalized P/E < 20 30.69 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Buffalo Wild Wings last year, the company has kept its five-point score. But the stock has rocketed upward by more than 40% over the past year as the casual-dining chain has beaten tough conditions in the restaurant industry.

High food costs have done a number on margins in the restaurant business, with many chains struggling to maintain sales. DineEquity (NYS: DIN) , for instance, has watched the market share of its Applebee's and IHOP chains fall, with projections of double-digit percentage declines in revenue both this year and next. Ruby Tuesday (NYS: RT) had a 5% same-store sales drop in its most recent quarter, leading the company to announce restaurant closures and other cost-cutting measures.

But Buffalo Wild Wings has bucked that trend, with rapid sales growth and a favorable pricing environment for chicken helping to support its profitability. Same-store sales have soared to their best gains in more than five years recently, closing in even on fast-food growth giant Chipotle's (NYS: CMG) impressive numbers. Buffalo Wild Wings has achieved that growth without as much volatility as Darden Restaurants (NYS: DRI) has experienced with the unreliable performance of its Olive Garden chain.

In addition, Buffalo Wild Wings is expanding broadly. Yet even as the company has well over 800 locations in North America, it maintains a much more ambitious goal of topping the 1,500 mark in the long run.

It's hard for restaurant chains to reach perfection on this 10-point scale, no matter how strongly they perform. But Buffalo Wild Wings is definitely worth a look from growth investors willing to pay up for great results.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Buffalo Wild Wings isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Buffalo Wild Wings to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Chipotle, Buffalo Wild Wings, and Darden. Motley Fool newsletter services have recommended buying shares of Chipotle and Buffalo Wild Wings, as well as writing covered calls on Buffalo Wild Wings and creating a bear put spread position on Chipotle. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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