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What a difference a night makes.
Buffalo Wild Wings (NASDAQ: BWLD) reported earnings results for the fourth quarter ending Dec. 31, 2013 after the market closed on Tuesday, and the initial headline was a positive report.
The company reported adjusted earnings of $1.10 per share, beating estimates by a few pennies per share. Revenues, though, were less than expected with $341.5 million in sales versus estimates of $345 million.
Even with the revenue miss, the initial reaction was for investors to bid up shares in Tuesday evening after-hours trading. Perhaps the thinking was the Buffalo Wild Wings stock would explode higher in regular trading on Wednesday on the earnings beat.
Chipotle Mexican Grill (NYSE: CMG) shares jumped more than 10% after it reported profits that beat estimates by a penny per share.
So why then did shares of Buffalo Wild Wings tank more than 10% when shares opened for trading on Wednesday? Part of the problem is market conditions, which continue to be weak, but the real reason is the revenue miss.
Investors can be a fickle bunch and the earnings report opens the door to so many reactions, many of them neurotic. It’s always best for companies to not open that door by offering a pristine report.
A pristine report can be defined as one that beats earnings, beats revenues and raises guidance or at a minimum, maintains guidance. Absent one of those things, the shorts can attack.
That is especially true when the valuation of the stock is at a premium.
Analysts expect Buffalo Wild Wings to grow profits by 25% in 2014. At current prices, including the 10% discount on Wednesday, shares trade for 19 times 2014 estimated earnings.
19 times earnings is a big price to pay for the stock, but it is not a huge premium. Relative to expected profit growth, one could argue that the stock is in fact cheap. It is most certainly cheaper than it was before earnings came out. The fact that the company beat earnings should have trumped the sales miss, but alas that was not the case.
I would use the discount in shares to acquire the stock. It is far more likely that profit growth will be greater than 25% in 2014. The company has exceeded analyst estimates in the last three quarters reported.
That is a solid track record, and buying 25% growth as it is currently expected for a price less than 20 times earnings is a good price to pay.
I would look to take advantage of the selling by owning Buffalo Wild Wings at these levels.