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Hot sauce, hot stock: can Buffalo Wild Wings stay on fire?

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Russell Akred brought the heat to the grand opening of Buffalo Wild Wings' new prototype restaurant. Akred ate 12 Blazin Hot Wings in two minutes to win the Blazin Challenge, Dec. 17,2012, In Cincinnati.(Photo by Tony Tribble/Invision for Buffalo Wild WIngs /AP Images)

Buffalo Wild Wings (BWLD) made a shrewd decision this year, one that will be critical in determining how successful the chicken seller will be in the months and years to come.

Instead of plying guests with 12 wings counted out, the Minneapolis-based restaurant operator now serves up fare based on weight. That means you don't go in and order a dozen wings today. Instead, if you want around that amount, you'd order a small, translating to "at least 10," or a medium, totaling "at least 15."

The reason is simple. Buffalo Wild Wings buys its chicken by the pound. Previously, it was selling that chicken based on the number of wings diners wanted. Yet wings, the company says, are growing larger as modern farming techniques are producing bigger chickens. This means customers were getting more meat per order than they had in the past. As CEO Sally Smith said on CNBC: "We had a yield problem."

Enter sale-by-weight. No, you don't order a pound of wings at the store, but what's happened is the company is better matching the price it charges you with the price it pays for its chicken. Although that might mean you get fewer wings counted out, in the company's view, there's as much meat in the current five as in yesterday's six.

The shift, still in its infancy, might be what keeps Buffalo Wild Wings' red-hot stock heading higher. This year it's bolted 95.5%, nearly four times the S&P 500's gain. Combine chicken, beer and sports, and you may be on to something, in other words. While there's reason to believe that, at least for a few months, shares will continue climbing, the risks to that thesis aren't remotely trivial.

Hotter the better?

Wings are serious business in America. McDonald's (MCD) got in the game with a recent Mighty Wings promotion, and chains such as Wingstop and Wing Zone are taking their chicken global. Buffalo Wild Wings is also eyeing an international expansion; the company already has a handful of stores in Canada.

Analysts expect the company to have sales of $1.27 billion this fiscal year, up 22% from last year to an all-time high. Expansion has been rapid, considering that, in 2007, revenue was only $329.7 million. These days, it's nearing its 1,000th location.

We do love chicken. The National Chicken Council, citing Agriculture Department data, says the average American consumed 33.7 lbs. of chicken in 1965. For 2014, the estimate is that it will reach 85 lbs. worth. Wings were 39% of last year's store revenue for Buffalo Wild Wings, while alcohol was responsible for around 22% -- it's effectively a sports bar.

What could keep the stock increasing is the calendar. The NFL playoffs start in January, culminating with the Super Bowl Feb. 2, and the biggest game of the year equates to the ultimate event for wings. In 2012 it was projected Super Bowl week would see more than 1.2 billion wings eaten, making it the busiest season by far.

In the past four years, Buffalo Wild Wings' stock has risen an average of 7.6% from the first trading day of the year through the Friday before the game. This is clearly not guaranteed to repeat, and in years past, most recently 2009, shares have fallen. Helping the stock now is momentum. Restaurants overall have advanced about 50% this year, well ahead of the market, and "growth" names have been highly coveted by mutual fund managers.

Another upcoming event has the potential to keep wings flying out of the kitchen, and it's not the Winter Olympics. It's the June arrival of the World Cup, an every-four-years tournament that will play out in Brazil for a month. (Disclosure: Yahoo Sports partnered with Buffalo Wild Wings on a fantasy football draft earlier this year.)

Meanwhile, the company has aligned with PepsiCo (PEP) on a deal that will see Pepsi sodas replacing Coca-Cola (KO) products. At the same time, it also introduces the possibility of some intriguing food combinations. PepsiCo owns Frito-Lay, the parent of Doritos and Cheetos -- Cool Ranch wings, or Buffalo Frito pie, perhaps? It's also stepping out of its wheelhouse and getting in on craft pizza.

The possibly bad

Eventually, the stock's blistering pace will abate. It's getting hard to imagine new investors will continue driving it up, at such a rapid clip, for much longer. Shares ended Monday at $143.58, and Wall Street has a consensus price target of $149.80 on it. Already, it's eased off the all-time closing high of $151.82 it reached less than a month ago.

Its forward price-to-earnings ratio of 30.7 is considerably ahead of the 21.5 average of the past half decade, and close to its peak. There's little doubt it's been propelled higher partly by short sellers abandoning their efforts to benefit from a price decline. Short interest has dropped 60% in the past year, and traders moving to cover unprofitable positions likely contributed to the uplift. That fuel isn't in infinite supply.

Then there's the question of whether it's a fad stock, like a Crox (CROX) or Boston Chicken, which is now private. This wouldn't mean it's a bad company, just that stocks can and do get overheated. Even a slight disappointment (such as merely meeting earnings estimates) potentially could hit the shares.

Finally, an outsized jump in chicken costs would hurt earnings, absent more price increases. And how much room is there on that front? As it stands, a small wings order with a side of fries runs more than $12 and beyond depending on where you live. For Regular Joes, that's getting up there.

Quarterly wing expenses averaged more than $2 a pound late last year, though they've eased in recent months. In the most recent third quarter, Buffalo Wild Wings paid an average of $1.71. They've continued to fall, but It can't be overstated that cost controls will be crucial to the company's financials.

If the stock market keeps gaining and the restaurants stay in vogue, Buffalo Wild Wings' shares may have some room left to rally. That said, it has to be getting harder to commit for a long-term trade.

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