UPDATE 1-Morgan Keegan downgrades Buffalo Wild Wings

(Recasts, adds details, share movement)

Sept 12 (Reuters) - Morgan Keegan downgraded Buffalo Wild Wings Inc (BWLD.O), an operator of bar and grill restaurants, to "market perform" from "outperform" based on valuation.

Buffalo Wild Wings shares, which have gained more than 70 percent of their value since the start of the year, fell as much as 9 percent in Friday morning trade.

"With shares... trading at substantial premiums to its peers, and operating headwinds still weighing on the industry, we believe the shares appear fairly valued at recent levels," Morgan Keegan analyst Destin Tompkins wrote in a note.

Buffalo Wild Wings shares were trading at 28 times forward earnings, outstripping its peers like Texas Roadhouse Inc (TXRH.O) and CBRL Group Inc (CBRL.O), who were trading at a multiple of 16.5 and 10, respectively.

Buffalo Wild Wings could report better-than-expected results for the third quarter, but the current share price partially reflects that potential, Tompkins added.

However, the company's operating fundamentals remain strong and its robust same-store sales momentum is expected to continue into 2009, the analyst said.

He also expects chicken wing costs to remain favorable through the rest of 2008, but added that chicken production is slowing and could yield higher chicken prices in 2009.

Chicken wings made up about 21.5 percent of Buffalo Wild Wings' cost of sales in the first half of the year.

Analyst Tompkins expects the company to post third-quarter earnings of 32 cents a share. Analysts on average expect earnings of 30 cents a share, before items, according to Reuters Estimates.

Shares of the company fell $3.11 to $36.92 on Nasdaq. They touched a low of $36.50 earlier in the session. (Reporting by Shivani Singh in Bangalore; Editing by Himani Sarkar)