Focus Stock: Time to Order Buffalo Wild Wings?

Buffalo Wild Wings (BWLD; recent stock price, $28), the growth-minded operator and franchiser of Buffalo Wild Wings restaurants, has excellent long-term growth prospects, in our view. We think the company may gain market share from less efficient or less conservatively financed competitors during a recessionary economic environment, as it will likely continue its aggressive expansion plans. Furthermore, growth is likely to continue to be financed with cash from operations, and we expect Buffalo Wild Wings to remain debt free under current expansion plans.

Our 5 STARS (strong buy) recommendation was prompted by the recent sell-off in the shares following third-quarter earnings that were below our expectations. However, the shortfall in earning per share relative to anticipated profits had very little to do with poor operating performance, by our analysis. In fact, much of the difference was due to higher management bonuses and stock compensation expenses as a result of what we view as relatively exceptional performance; same-store sales at company-operated restaurants rose 6.8% in the third quarter, and average weekly sales increased 10.1%. As our long-term outlook for the company remains intact, we view the recent sell-off as a particularly compelling buying opportunity.

COMPANY PROFILE

Minneapolis-based Buffalo Wild Wings owns and operates, as well as franchises, a chain of restaurants serving a menu comprised of its Buffalo-style chicken wings and a variety of signature sauces, along with an array of alternative menu items. The Buffalo Wild Wings restaurant concept is that of a neighborhood restaurant and bar, with the feel and atmosphere of a sports bar. Locations also offer counter and takeout service options similar to those found in a typical quick casual restaurant.

From the first restaurant opened in 1982 in Columbus, Ohio, and subsequent to the company's initial public offering in 2003, the restaurant chain has grown to about 550 locations. Slightly more than half of its restaurants are located in six Midwestern states of Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota, along with Texas. As of mid-2008, we would characterize the company's presence geographically as under-penetrated in the Pacific and Mountain regions, as well as in New England.

We view the Buffalo Wild Wings concept as a hybrid casual dining/quick casual concept, with an added sports bar emphasis. Standard & Poor's estimates that sales of commercial eating and drinking places in the U.S. will increase 2.3% in 2008 and 1.2% in 2009.

According to the latest information available from the company, wings account for 23% of average restaurant sales, boneless chicken items such as chicken sandwiches and tenders 14%, alcohol 28%, and all other food and beverage items 35%. Bar offerings include approximately 20 domestic and foreign beers, as well as wine and liquor. Kitchen operations have been designed in an assembly line style and can be staffed typically with unskilled hourly workers who, according to the company, require only basic training before reaching full productivity.

Of the company's 535 locations as of September 2008, 187, or 35%, were company-operated. The land and buildings are leased for nearly all these locations. Most of the restaurants range in size from 4,500 square feet to 6,500 square feet. Average cash investment in 2007 was $1.4 million, exclusive of $180,000 of pre-opening costs, on average. Restaurants are typically located near retail centers and other high traffic destinations, such as big box retailers and multiplex theaters.

The remaining 348 locations were franchised. Franchisees may initially enter into a franchise agreement or an area development agreement. Initial franchise fees for the first location are $42,500 but then may vary from $12,500 to $32,500 per location depending on a variety of factors, including proximity of new restaurants to the franchisee's existing locations.

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For the Next President, the Fastest Transition Ever

The winner on Tuesday, Nov. 4, won't get much of a chance to rest on his laurels—or rest at all, for that matter. The calendar may show 11 weeks until Inauguration Day, but the President-elect will be expected to stage what may amount to the fastest transition in history.

"He'll have about a day to rest. His Presidency will start on Nov. 6," says one top staffer for a key Democratic senator.

That may be a slight exaggeration, but events won't wait for the new Administration. Congressional Democrats are laying the groundwork for a fiscal stimulus package they hope to pass in late November. Under pressure from European leaders—and perhaps with an eye on his own legacy—President Bush is hosting a summit of world leaders on Nov. 15. House Financial Services Committee Chairman Barney Frank (D-Mass.) has scheduled a hearing on the bailout for Nov. 18. And the President-elect may hold his own economic summit as well, as Bill Clinton did in 1992.

Meanwhile, Detroit is clamoring for $25 billion more in loan guarantees (BusinessWeek.com, 10/31/08), and all sides say something has to be done—soon—to help homeowners and stem the housing market collapse.

A History of Wrong Guesses

Whoever wins, naming a Treasury Secretary is sure to be high on the list, followed by other key economic posts. Among other things, an early Treasury nominee will give the new Administration more influence over how the rest of the $700 billion bank bailout is rolled out.

Beltway pundits are working overtime to predict who will snag this key job, but "the guesses about the Clinton Cabinet were hilariously wrong in almost every respect," says Matt Bennett, spokesman for progressive Washington think tank Third Way, who worked in Clinton's 1992 campaign and in the White House during his second term. "Even Lloyd Bentsen [Clinton's first Treasury Secretary] wasn't on the top of people's lists."

Says Paul Stevens, CEO of Investment Company Institute, a mutual fund trade group: "I've heard about six different names, but in Washington that means it's none of the six."

The Bush Administration has already set aside a conference room for the winner's Treasury transition team and is preparing reams of briefings on everything from terrorism financing to travel policies. Nor is cooperation likely to be confined to administrative matters.

"There's no question we'll be consulting on big decisions with the President-elect's team," a Treasury Dept. official says. "It's in the best interests of the financial markets."

Hold Off Till January?

But the President-elect might consider mimicking Franklin Roosevelt, who famously declined to help out with policy before Inauguration Day during the Great Depression, on the grounds that the country has one President at a time. That's especially true with the planned Nov. 15 summit, which is likely to chart broad policy with little concrete action.

"There is a principle behind it, but it's also politically smart," says one lobbyist on financial issues. Both candidates have worked overtime to distance themselves from the deeply unpopular Bush Administration, and working too closely with it just weeks before taking office could undermine public support for the President-elect's policies.

But even if they don't get visibly involved in policy decisions just yet, economic advisers to whoever wins will undoubtedly start working overtime to better understand the nitty-gritty of how the Treasury is managing the financial rescue plan and making decisions about who does and does not get money.

Then there's Capitol Hill. With an Obama victory and a significant increase in the Democrats' margins in Congress, a bare-bones, lame-duck session is likely this fall. That session would focus on a fiscal stimulus package that includes extended unemployment benefits and perhaps aid to state and local governments; more sweeping fiscal measures would wait for the new Administration.

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Auto Sales Worst Since 1983

A combination of plunging consumer confidence and shortage of credit is pushing auto sales to their lowest monthly levels since the early 1980s—and the automakers themselves to the financial breaking point.

The U.S. Big Three automakers—General Motors (GM), Ford (F), and Chrysler—reported big double-digit declines in October sales: Ford was down 30%, GM off 45%, and Chrysler down 36%. Overall, auto sales were down 32%, according to Autodata. The research firm also said the annual monthly selling rate for October was 10.5 million units, down 32% from a year ago. That's the number of auto sales there would be for an entire year if every month was as bad as October. In October 2007, the annualized selling rate was 16.4 million.

"It was like somebody turned the lights off in October," said GM sales and marketing chief Mark LaNeve. According to GM, October, after adjusting according to sales per capita, was the worst month for sales in the post-World War II era. It was worse even than sales in September and October after the Sept. 11 terrorist attacks against New York and Washington in 2001. "In my 27 years in the business, I've never seen a month like this," said an exasperated LaNeve.

The declines aren't limited to U.S. brands. "The carnage was completely widespread," said GM's LaNeve. Toyota (TM), despite huge ad spending and zero-percent financing, reported a sales drop of 23%. Nissan (NSANY) was off 33%. Hyundai was down 31%. Suzuki was down 44%. Luxury makes weren't spared. Mercedes-Benz (DAI) was down 26% and BMW was off 10%.

Lobbying Washington

It's the worst month for auto sales since February 1983, according to Autodata. It is also lower than the worst Wall Street forecast for October.

GM and Ford are both expected to release third-quarter earnings this week. The losses are expected to expose GM and Ford's burning of limited cash reserves to make up for falling revenue and profit. GM was burning about $1 billion per month at the end of the second quarter. But as sales have worsened since the summer, along with the broader meltdown of the equity and credit markets, the burn is expected to be worse for both companies.

Chrysler, which is privately held, does not report its financial results.

The Big Three automakers are aggressively lobbying Congress and the White House for loans to help them get through 2009 and the current downturn. Without help, many analysts believe the automakers will run out of money by midyear. Few, however, believe the government won't act to help GM and Ford. GM is trying to acquire Chrysler (BusinessWeek.com, 10/31/08) in the hopes of cutting enough costs to save the combined automaker.

Ford chief of sales analysis George Pipas says the biggest headwind for Ford is consumer confidence. "There is so much going on, it's just easier for the consumer to stay on the sideline for a while," says Pipas.

Both Cars and Trucks Hit

Some months, and even some quarters, sales favor either cars or trucks depending on gas prices and economic indicators like housing starts. But the pain is being felt throughout automakers' lineups. At Ford, sales of its fuel-efficient Focus were down 18%, and its trucks and SUVs were down 30%. Volvo sales at Ford were down 51%. At GM, trucks and SUVs were down 52% and passenger cars were down 34%.

The absence of credit, U.S. households' historically high credit-card balances, fears of rising unemployment, and depressed housing values, which have helped home-equity credit lines evaporate, are all keeping consumers on the sidelines. "One thing about a new car or truck is that very few people absolutely have to have a new one.…Most people can keep driving the one they have, indefinitely," says marketing consultant Dennis Keene.

U.S. consumer confidence fell to the lowest level on record in October as stocks plunged and banks shut off credit. The Conference Board's confidence index tumbled to 38, less than forecast and the lowest reading since monthly records began in 1967, the New York-based research group said on Oct. 28.

Auto executives say yearend sales will begin this week, with more advertising hawking incentives on the airwaves after the Presidential election is over tomorrow. But what sales the automakers book will set them up for a big hangover in 2009. The first quarter of any year is traditionally the weakest. Industry sales in 2009's first half will be "sobering," says Jim Farley, Ford's worldwide marketing chief.

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Election 2.0: An Online Guide for Political Junkies

During the last two Presidential elections, the Internet played a bigger role as news organizations supplemented their coverage with online posts. But more than in any previous election, the 2008 contest will be covered from every possible angle online.

A few relatively new Web sites have become essential for election junkies. Politico, launched in 2007, showcases established names as well as younger talent with stories, blogs, and columns on the candidates and the issues. RealClearPolitics has a comprehensive list of the day's major op-eds as well as an in-depth, right-leaning commentary section. There's also Talking Points Memo, which has a left-leaning perspective and has surged in popularity this fall.

Then there are, of course, the more traditional news outlets. CNN is known as a top source for exit polls and state-by-state vote results, with its Web site often posting results more quickly than the broadcast counterpart. Meanwhile, networks such as ABC, CBS, and NBC are offering a combination of live news streams from their newsrooms and election headquarters, as well as blogs and interactive electoral maps. PBS and National Public Radio have an interactive map, along with election news and analysis from public broadcasting stations across the country.

The New York Times plans to offer video updates online every 30 minutes from 7 p.m. to 12 a.m. Eastern time, featuring reports from the paper's correspondents, plus interactive maps. The Wall Street Journal's Election 2008 page also has video reports, analysis, interactive maps, and an Electoral Compass that allows readers to measure their political leanings. Social networking sites are also getting in on the game; MySpace will air a live stream of MSNBC's coverage on its MySpace Decision08 page, along with a map that will update election results in real time, blogs, and user-generated video.

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Stocks: Rating the 2008 Meltdown

For many who work and invest in the stock market, the past two months have been an unmitigated, once-in-a-lifetime disaster. You only have once chance to save for retirement, so a 40% drop in your stock portfolio feels like the end of the world.

You start to question all the advice that you've been given. With major indexes trading at the same levels as in 1998, folks who have been equity fans start to wonder whether it's really true that, over the long term, stocks tend to outperform other investments (BusinessWeek, Oct. 30, 2008). Ask economic historians for their read on the situation, and, not surprisingly, they take the longer view. They don't say, "Don't worry about it. It's no big deal."

Many financial experts think the crisis has scrambled our assumptions about the risks and returns of investing in stocks. But experts do know this is hardly the first—nor will it be the last—time that the world's investors have been seized with panic and hit with deep losses.

Another Dark October

For investors wondering what the future holds, the key question may be whether this crisis is just another (very big) bump along a road to prosperity, or whether the financial markets have driven off the road into a ditch.

So how bad is the current mess? It's worth crunching some numbers:

In October 2008, the broad Standard & Poor's 500-stock index fell 16.8%, following a 9.2% drop in September. The Dow Jones industrial average dropped 14.1% in October, following a 6% decline in September.

Other Months Were Worse

Through the first 10 months of the year, the S&P 500 has lost 34% and the Dow shed 29.7%. From their all-time high points—on Oct. 9, 2007—the Dow is down 34.2% and the S&P 500 has lost 38.1%. (Those are much better than the losses of about 45% that the indexes had registered at their lowest levels this fall.)

How does this compare to history? For the Dow, the percentage losses of October 2008 are exceeded by 15 other months since 1928, including September 1931, when the Dow plunged 30.7%. Other rough months, according to the Stock Trader's Almanac, were in 1929, 1930, 1931, 1932, 1933, 1938, 1940, 1987, and 1998.

If the S&P 500 finishes 2008 at this level, its 34% annual decline would be the third worst since 1930, beaten out by 1931 and 1937. However, if stocks recover a bit, 1974's 29.7% drop for the S&P 500 and 2002's 23.4% fall in the index might be worse.

Rules Haven't Been Rewritten

For Richard Sylla of New York University's Stern School of Business, this year's crisis is one of a long line of rough periods for equity investors. "It's a bear market like a number of bear markets," he says. It's not as if the fundamental rules of investing have been rewritten, he says. "The stock market hasn't changed its stripes."

For current investors saving for retirement or other needs, a big worry is that the stock market is a big bubble that has collapsed. Stocks got way overpriced, this theory says, and investors might never get back those losses. A prime example is the bubble in technology stocks in the early 2000s, when the tech-heavy Nasdaq composite hit a high of 5,132.52 in March 2000.

With the Nasdaq now trading at 1,720, it could be a lifetime or two before it approaches its heights during the bubble.

Reacting to Banking Bad News

Eugene White, a financial historian at Rutgers University, doesn't think this is a similar situation. "What's happening now is the stock market is reacting to the bad news in the banking sector and to the economy as a whole," White says, not an overvaluation of stocks themselves. While neither White nor Sylla knows when stocks will recover, White insists "fundamentals look pretty good," especially the U.S. economy's ability to improve its own productivity over time.

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McCain and Obama on Tax Reform

Hardly anyone disagrees with this statement: The nation's tax system is a mess. The U.S. tax code is riddled with far too many deductions, credits, exemptions, exclusions, phase-ins, and phase-outs. Nobel laureate Milton Friedman noted half a century ago that constant changes in the tax code discourage long-term planning by households and businesses. He was right, but that hasn't stopped Democrats and Republicans from tinkering with taxes ever since the income tax was imposed in 1913.

Perhaps it's the safest forecast in politics and economics that history will repeat itself when it comes to the tax code. It's going to get even more complex next year, since both John McCain and Barack Obama are proposing major tax initiatives.

For instance, among his proposals, McCain wants to make the 2001 and 2003 tax cuts permanent (with the exception of the estate tax repeal), phase in a two-thirds increase in the dependent exemption, and offer a voluntary alternative tax with two rates and a larger standard deduction and exemption.

Essential Difference

Obama is more aggressive in the number of his proposed tax plans. They range from creating income-related subsidies for health insurance to refundable "Making Work Pay" credits and "Universal Mortgage" credits. He'll increase the maximum capital-gains tax to 25%. He will keep some of the 2001 and 2003 tax laws, such as the child-credit expansions and the 10%, 15%, 25%, and 28% income rates.

That breakdown of the two tax plans comes from the Tax Policy Center, a joint venture between the Urban Institute and the Brookings Institution. Its recent analysis captures the essential difference between the two tax approaches:

• Senator McCain's tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their aftertax incomes by more than twice the average for all households. Many fewer households at the bottom of the income distribution would get tax cuts, and those whose taxes fall would, on average, see their aftertax income rise much less.

• In marked contrast, Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers. The largest tax cuts, as a share of income, would go to those at the bottom of the distribution, while taxpayers with the highest income would see their taxes rise.

McCain Wins on the Simplicity Front

For many voters, that's all the information they need to know about the candidates and taxes. But there are other ways to judge. For instance, by one critical measure—how they would deal with the omnivorous Alternative Minimum Tax—both plans are failures. The AMT was designed in the late 1960s to make sure that the very wealthiest Americans paid at least some tax. Yet because it was poorly constructed, some 3 million taxpayers now pay the AMT, and by 2010 that figure could swell to 30 million, according to William Gale, economist at the Brookings Institution.

Congress and the White House have punted for years on the AMT, largely because neither political party is sure how to replace the lost revenue. It's estimated that repealing the AMT would cost at least $800 billion over the next decade. Instead, Washington has preferred to rely on a series of "patches" to keep the dreaded tax from reaching deep down into the middle class. Both McCain and Obama plan on continuing that ignoble Washington tradition.

By the metric of simplicity, McCain edges out Obama. For one thing, he's proposing fewer tax initiatives. For another, he has embraced repealing various corporate loopholes, such as eliminating the preferential treatment of oil companies, in return for a lowering of the corporate tax rate from 35% to 25%. Nevertheless, neither candidate is embracing dramatic simplification by broadening the tax base and eliminating a wide range of deductions and credits.

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Marcial: Could GE Be a Cheap Global-Comeback Play?

General Electric (GE) has come to symbolize the jarring impact of the swift deterioration of the global financial system and darkening economic outlook. Shares of the once-mighty Wall Street kingpin have tumbled to multiyear lows, as analysts have grown impatient with the giant industrial and media conglomerate's turtle-paced growth. There is also a fair amount of anxiety about the health of GE's finance operations. These factors have prompted many of its Wall Street followers to downgrade the stock and scale back their earnings and sales forecasts for 2008, 2009, and 2010.

But the nasty drubbing that GE has suffered—which took its stock price from a high of 42 a share on Oct. 31, 2007, to an 11-year low of 17.83 on Oct. 24—may now have moved its besieged shares from the "unwanted" stock category to the "bargain" bin. The shares may not only be luring buyers because of GE's depressed p-e ratio, but also because of what CEO Jeffrey Immelt and his management team have been doing to improve the company's liquidity, partly by repositioning its finance portfolio and restructuring the company.

"We remain upbeat over the long-term outlook beyond the difficulties in the current year," says Stephen O'Neill, an analyst at investment firm Hilliard-Lyons (it has done banking for GE). O'Neill is a bull on the stock with a 12-month target of 25 a share. He notes that in spite of being "blindsided" in the first quarter—following the problems in the domestic housing market and the shock caused by the Bear Stearns insolvency—GE managed to meet its second-quarter earnings guidance. Unfortunately, more of the same financial difficulties impacted the third quarter, resulting in analysts' downward revision of their earnings expectations for 2008 and 2009, he notes.

how the bulls see it

The stock, which traded at 19 on Oct. 31, is trading at depresssed 1997 levels, although it had more than doubled earnings since that time, significantly improving its business portfolio. Over the last seven years, GE sold its life insurance, mortgage insurance, bond insurance, reinsurance, and materials businesses. For a while, rumors swirled that GE might also unload NBC. But Immelt publicly said it would hold on to the media-TV leader.

At its current price, GE is trading at about 9.6 times 2009 estimates. The last time it traded at that p-e was in 1982. GE's price-earnings multiple was as high as 50 in 1999.

With the problems at GE Capital, which offers credit facilities and loans to customers, how do the bulls expect GE to come out a winner?

Here is how O'Neill sees it: GE's infrastructure unit appears poised for sustained long-term growth. The large energy unit is positioned to benefit from strong global demand for energy production, and for alternatives to fossil fuel generation, in light of concerns over global warming. Its aviation and rail businesses are experiencing strong shipments. Newer areas of business, such as wind power, are likely entering a growth phase.

Other growth platforms such as water, security, digital media, and health-care info tech are being developed. And the company is making progress in turning around its NBC and health-care operations.

short-term liquidity problems licked

Meanwhile, GE has taken several steps to strengthen its capital and liquidity position. It raised $15 billion in cash, including the sale of $3 billion in preferred stock to Warren Buffett's Berkshire Hathaway (BRKA). GE is also benefiting from some of the government's rescue programs.