The Buffalo soldiers have come to America.. in the form of the 1,000th BWLD franchise. Folks who got in when Dave Gardner recommended the stock back in 2002 or so (no, I'm not one of them, sadly; I wasn't spending any time on investing then) have had a nice ten-bagger for their trouble.
Even if you've paid attention in this space you've had a one-bagger for your pains. And that's a place where I like to stop and reflect for a moment, especially as the stock just went briefly parabolic following earnings and guidance that were better than even the high Street expectations.
BWLD is a company that serves food and drink. A lot of people can understand that. It's the kind of stock Peter Lynch used to love; he could ask his daughters about it because they might eat there, or know someone who does. They'd probably like it. (And it's a franchisable restaurant that was trading at a P/E below 20; I can see Peter Lynch explaining why he'd 'back up the truck' on it.)
But what I want to talk about today is BWLD's moat. "Now wait just a minute," I hear you say. "There's a lot of sports bars around town." There are indeed, and I've eaten wings in all of them. I even talk to the bartender, who every so often is also the independent owner-operator. And what you find is that these places are often run as a second career by semi-retirees, surly alcoholics who always wanted the 'perfect' place to come watch sports and drink beer, and so they built it, figuring, if I build it, they will come, and if they don't, well, I will kick back and have a beer and watch the game.
Yeah. I've watched more than one Super Bowl in a place like that.
Which is why I was interested to finally sit down in a BWLD a few months ago. Place was brightly lit. Bright colors were everywhere. There was a bar, with a few 3PM heavy drinkers seated at it - you could find the bar from the entrance, but it was acoustically and geographically isolated from the rest of the place, you practically had to navigate a maze to get over there. Now, I don't *like* surly alcoholics, so it was neat to me when I noticed that they'd been penned in a special behaviorally-isolated spot. They had plenty of TVs to watch the game on, but the rest of the place was not set up to cater to them and the real drunk who needs darkness and the reek of spilled beer to get his groove on would never have set foot in the place.
In the "main" pen - tables and hundreds of various-size TVs - you could watch any game you wanted without craning your neck, from any seat at the table, and without having to divert your gaze too much from your tablemate(s). Real sports fans who have real spouses - both will appreciate that. Foodies? Twenty-some-odd flavors of sauce, from straight traditional, to pratically floral, to just out-there weird flavor combos, to mouth-destroyingly, "My Indian friend would like this" hot. (No offense; I love really spicy food, but I've found certain Indians, especially Bengalis, enjoy a hotness level on food which most people have never even encountered, much less considered to be in the realm of 'edible'.) There were plenty of other things to eat, too. Vegan options. Delicious-sounding salads. Steaks and other grilled stuff. Fries. Sorority sister? 3 fluffy drink specials with ridiculous names and even more ridiculous ingredients for you. Nerd? Trivia machine. Child? Booster seat, special food, games to distract and entertain. Noise sensitive? Place is relatively quiet, yet the sound systems are adjusted so you can hear the game broadcasts. Deaf? Captions are on. Like NFL? Hockey? Basketball? Baseball? Olympics? Golf? NASCAR? Drag racing? Curling? MMA? (ew.) It's on.
Point is, the place is family friendly, drunk-friendly, and it has something for *everyone*. I wouldn't be surprised if they could put a Disney princess movie on one of the screens if your tot requested it - and if they can't, they should, because that's what they do - they have something for any human being that might walk in the place.
And the bathrooms, at least the one I visited, showed evidence of heavy scrubbing - and they were *clean*. Spotless.
Now. Let's re-visit the idea of the competition. A solo operator, a surly alcoholic who built himself a man cave and who deigns to serve you beer and liquor in it.
These aren't real competitors. They're not even in the same industry. One is retailing booze - sure, you may find a guy who's proud of his wing sauce. But can you find him when you travel out of town?
The other, BWLD, is selling an experience. And it's working - they have 1,000 of them and none are losing money. Individual surly alcoholics don't - can't - compete. There are no other chains that are quite in this niche; and wow, any who try to start have a pretty solid headwind to compete against - their customers want to go to BWLD.
Let's revisit the financials. BWLD doesn't see their management challenges the same way I do. (And that's good, because I have zero experience running a restaurant chain.) They have 1,000 locations, have opened a few in Canada and Mexico, but see their goal as still being opening 1,700 locations in the US by 2020, and then they'll consider the US market 'saturated.' They are extremely picky. They look at comps as a personal mission - they want to open up these restaurants always and only in the correct locations - I looked through it, they are crazy restrictive, there is not a single place in my town of 50,000 that would fit the bill - and frankly, I think they must be right, because they are making money wing over fist.
So let's say that if they continue increasing comps at 4% yoy and they open their next 700, plus a handful in other countries; their earnings may double. Now when I look at a stock that doesn't have a rock-stable business model - and what do I mean by that: very few companies deserve a Warren Buffett-type look at them; things change; - I like to look at a stock like BWLD with a 5 year time horizon and figure that the price I pay today should give value 5 years down the road. I pick 5 years because I don't think I would have predicted the iPhone in 1997 and I don't think I would have predicted $1800/oz gold in 2001. 5 years is about as far as my crystal ball goes. (True for medical prognosis, too.)
So right now the last 4 quarters of earnings are $3.59 and the stock price is $143. The market, on the other hand, appears to look at this exactly as I do - fair value is P/E 20 (so said Peter Lynch, 30 years ago), 5 year earnings growth should just about double earnings, so fair value right now is P/E 40. (If you don't care to do the math, the actual calculation is 142.745 at Friday's close, / 3.59 = 39.76, good enough for government work.)
So let's talk about decision making. I have a 30 year time horizon, but because of my situation I have an aggressive risk tolerance. I want to get in on serious growth. In the case proposed by management - and management is excellent - and what they say is, this company doubles earnings in 5 years - and I just told you it's already fairly priced to do so.
I know Wall Street tends to overvalue stocks, and I actually see upside to the proposed case. I think there's an international market for BWLD - not just Canada and Mexico, but South America, Europe, and China too. American sports are hugely entertaining and the whole world already watches. (Some of the folks in my fantasy football leagues are European - and when I say fantasy football, you already knew I meant the NFL, not soccer, didn't you? You know, too.) I also think the market is getting a little toppy - has a little more to go - and so that makes me think, what should I do here?
Well. I think Wall Street might push a company like this to a P/E of 46 without thinking too hard - that'd be, what, $153 and change - and then again, if the market decides to tank, the wheels might come off instead.
So I'm electing to take some profits at this level, little less than half my stake. Now my portfolio is back in balance, I've got some cash to play with if the market tanks as I expect it to, I never have to worry about losing money on BWLD again - I can't, even if it goes to zero - and if the company expands into China and opens its 10,000th location in 2030, well, I'll still show a handsome return on it. And if Wall Street does something dumb like knocking the price of BWLD down to $70 again, I won't hesitate to re-up, tripling the amount of my stake but with no more than my original cost basis back into the stock - because the folks who trade these stocks aren't thinking the way that I do, which is the right way to think about buying stock in a company.
I will close with this: NEVER underestimate how much money you can make selling chicken to Chinese folks. Most folks who eat meat love chicken - but, and again, no offense intended, Chinese folks really, really love to eat a chicken. I think it's in their culture. If a great general changes the course of our country's history, Americans build a statue to him - the Chinese name a special chicken dish after him, and don't pretend you don't know what I'm talking about. (Frankly I think the Chinese have figured out a better way to honor a guy, but that's a topic for another blog.)