BWLD Buffalo Wild Wings, Inc. (delisted)

Industry Rank Analysis 5-24-11

Sometimes the most interesting results from the Zacks Industry Rank come when things seem counter to what one might expect given the overall macro picture. One would think that with unemployment still very high, and prices at the pump taking a big bite out of consumer’s wallets, that people would be cutting back on going out to eat. Also, food prices have been headed up, and that presents a potential margin squeeze.

However, the Restaurant Industry is doing very well based on earnings surprises and subsequent upward estimate revisions. Those are, of course, the main factors that drive the Zacks Rank. The industry currently comes in at number 39 on the list, an improvement of 16 spots from last week. The strong results from this group, one of the most discretionary of industries, suggest to me that consumers are getting more confident than is generally realized.

Zacks Industry Classifications

The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts. It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the "industry.”

Good Eats!

The Restaurant industry is a large one. It has 44 firms in it, and many of these firms are huge, household names, and often even relatively small firms by market capitalization are well known. A large number of firms makes it much less likely that the industry will end up on the top (or bottom, for that matter) of the charts. While 39th spot on the list would not be particularly noteworthy if the industry had only six or seven firms in it, it is significant when the industry has 44 firms in it.

What is interesting is that the restaurants that are doing well cut across the price spectrum. McDonald’s (MCD) and Morton’s (MRT) are both restaurants but have very different price points, yet both hold Zacks #2 Ranks. McDonald's is a worldwide operation, with most of its earnings and revenues coming from overseas, while Morton’s is far more domestically focused. Mid-range restaurants such as Buffalo Wild Wings (BWLD) and O’Charleys (CHUX) are also strong based on the Zacks Rank.

The first table shows the Restaurant stocks that hold the enviable Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. If the Zacks ranks were random, one would expect that only 5% of the firms in an industry would be “#1's” and 15% would be “#2's.”

That is not the case with the Restaurants. Five of them (11.3%) have Zacks #1 Ranks, and 11 (25.0%) have Zacks #2 Ranks. With the exception of McDonald’s, most of the firms on the two lists are small caps.

The valuations, particularly based on this year’s earnings, are not particularly compelling. They become more reasonable, but not exactly cheap, if you are willing to look out to next year’s earnings. Small successful restaurant chains often have excellent growth prospects, since the formula can be replicated over and over in new locations. However, they also have a tendency to flame out.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Dominos Pizza	DPZ	$1,512	16.02	14.39	5.64%	5.52%	$24.52
Bj'S Restaurant	BJRI	$1,358	47.13	39.34	6.66%	7.30%	$49.52
Buffalo Wld Wng	BWLD	$1,134	23.58	19.77	4.81%	3.99%	$62.23
Red Robin Gourm	RRGB	$548	35.05	25.93	-0.63%	1.36%	$35.08
Kona Grill Inc	KONA	$45	122.5	33.79	33.33%	141.67%	$4.90

Number 2 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
McDonald's Corp	MCD	$85,895	16.15	14.76	0.54%	0.78%	$82.33
Tim Hortons Inc	THI	$7,826	19.5	16.94	1.40%	1.98%	$47.05
Papa Johns Intl	PZZA	$871	15.88	13.63	2.08%	1.64%	$33.74
Biglari Holding	BH	$599	17.7	15.55	0.00%	0.00%	$418.00
Bravo Brio Rstr	BBRG	$446	29.58	23.48	0.00%	0.00%	$23.17
Country Sty-Adr	CCSC	$311	22.92	15.33	-2.87%	-1.52%	$12.42
Caribou Coffee	CBOU	$222	28.91	23.23	2.73%	0.00%	$10.87
Carrols Restrnt	TAST	$200	11.53	10.18	2.99%	3.41%	$9.26
Ocharleys Inc	CHUX	$155	N/A	105.78	15.75%	190.00%	$7.14
Benihana Inc	BNHN	$146	23.26	20.7	0.00%	0.00%	$9.42
Mortons Restrnt	MRT	$126	15.7	12.91	6.03%	2.48%	$7.46

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
 
BUFFALO WLD WNG (BWLD): Free Stock Analysis Report
 
OCHARLEYS INC (CHUX): Free Stock Analysis Report
 
MCDONALDS CORP (MCD): Free Stock Analysis Report
 
MORTONS RESTRNT (MRT): Free Stock Analysis Report
 
TIM HORTONS INC (THI): Free Stock Analysis Report
 
Zacks Investment Research