Can Buffalo Fly? Deutsche Bank Upgrades B-Dubs

Courtesy of Benzinga.

Citing its belief in the set up for changes, Deutsche Bank upgraded shares of Buffalo Wild Wings (NASDAQ: BWLD). The change according to the firm, can be either from the current management team through its recently introduced change, or as a beneficiary of a new point of view and strategic approach, if the investment community decides to move in another direction.

At Odds With Marcato

Analyst Brett Levy believes it has become unlikely the company and its fourth largest shareholder, namely Marcato Capital Management, which has been having a dispute over strategy, financials and leadership, can find a common ground on all issues. Levy indicated that shareholders will voice their opinions in an upcoming vote to determine the future of the company.

The analyst noted that the company has started to introduce significant changes since the two sides began their discussions.

Deutsche Bank looked into what the company has been able to achieve financially and strategically vis-à-vis the changes Marcato is clamoring for.

Marcato feels the 4-Wall profit margins are behind the longstanding target of 20 percent, while the management is continuing to target 4-Wall profit margins of 20 percent through the recently announced cost-cutting initiative and sales focus. In 2016, the company’s restaurant-level margins were about 17.7 percent, 250 basis points below 2011 levels.

While the company targets a mix of about 57 percent total units in the hands of franchisees, Marcato is advocating a 90 percent franchise mix by 2020. In 2016, about 49 percent units were in the hands of franchisees.

Modest Multiple Expansion Likely

Deutsche Bank has reevaluated its 2018 model, but its earnings per share estimate remains below consensus, as it feels same store sales, margin and earnings recoveries may take some time.

“We believe modest multiple expansion may occur as BWLD works to address its recent issues. Our multiple moves up one turn to ~10x (on our 2018 EV/EBITDA, implies a ~29x 2018 P/E),” the firm said.

“This multiple takes into consideration BWLD’s recent capital and strategic moves, but still discounts fundamentals given recent SSS struggles and the need for a continued recovery.”

Given a reduced 2017 outlook and cost cutting initiatives that created lower earnings hurdle, the firm believes following the upcoming board vote, the shareholder base may afford the winning side have enough time to implement the necessary changes.

Deutsche Bank rates the shares of Buffalo Wild Wings a Buy and lifted its price target to $180 from $155.

At the time of writing, Buffalo Wild Wings were surging up 2.57 percent to $161.40.

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