Overpriced Wendy’s Moves Lower
There are a growing number of companies not living up to their expectations and Wendy’s (NASDAQ:WEN) is one of them. The problem, at least for Wendy’s, could be a good one, however, and one that might well lead to a great buying opportunity. You see, Wendy’s didn’t have a bad quarter, it just didn’t have as great of a quarter as the market was hoping. In a world where “as expected” is not enough, missing the mark even by a penny is enough to get the market moving lower in a hurry. The key takeaway for investors is that Wendy’s is moving lower on good results and that could be a signal to buy, but we don't think so.
Wendy’s Growth Accelerates, Guides For Growth
Wendy’s had a bit of a mixed pandemic but one that is characterized by one thing; the brief hiccup in revenue experienced in the 2nd quarter of the year resulted in a massive rebound that is still gaining momentum. The Q4 revenue of $474.3 million is up $22 million sequentially and more than 11% from last year driven by ongoing strength in the fast-food industry. The bad news is the revenue missed the consensus by about 50 basis points.
The miss is due to weaker than expected comps, 4.7% versus 5.7%, that was partially offset by mix and pricing. U.S. comps did all the heavy lifting, comps in the International segment fell -2.0%, and that is with the inclusion of an extra week in the 2020 period. On a segment basis, the U.S. led with growth above 14%. The International market grew a smaller 5.5% but still respectable given the current operating conditions. Growth was fueled in part by the expansion of the business that included a net of 14 new stores globally.
Moving down to the bottom line, the company’s margins increased by 330 basis points on higher franchise revenues and strength in the company stores. The GAAP earnings of $0.17 came in in-line with the consensus because of it, although adjusted missed by a penny. Looking forward, Wendy’s is expecting growth to continue but once again at a rate that is, at best, in line with the consensus. The $1.84 to $1.87 billion in revenue is slightly better than expected and forecasts 6% to 8% growth but it is offset by weakness in earnings. The $0.67 to $0.69 in adjusted EPS is below the consensus midpoint.
Wendy’s, An Overlooked Fast-Food Play… Not
The analysts at Stephen’s recently called out Wendy’s as an overlooked recovery pick but we don’t agree. Trading at 37X its earnings it is no cheap stock when others in the group are trading well below that level. McDonald’s, the undisputed leader in hamburgers, trades at only 25X its earnings while Jack In The Box, the cheapest of the group, trades closer to 16X its earnings. Wendy’s might be a growth story but that growth is well-priced into the stock in our opinion.
Wendy’s does pay a dividend and it is relatively safe but there are a few caveats. The first is the yield. At only 1.7% it is barely above the broad market average and about 80 basis points less than what you get with cheaper, bigger, better-loved McDonald’s. Plus, if it’s value and yield you are after Jack In The Box pays a comparable 1.5% for less than half the cost.
The Technical Outlook: Wendy’s Is In Multiple Contraction
The fast-food sector is hot and Wendy’s is a good company but its growth is more than priced into the stock. With others in the group trading at cheaper multiples and paying comparable if not higher yields, it is no wonder this stock is in free-fall now. The risk for investors is that support at the $20 level will fail. If it does this stock could find itself retesting for support at the $19, $18, and possibly lower levels.
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