In the fast food market, Wendy’s (NASDAQ:WEN) has renewed both its growth attributes and market positioning in recent years, as it has been recording strong financial performances. The company operates in the growing fast-food industry, where it holds a leading position, while expectations have been raised regarding the company’s financial future.
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Despite a somewhat pricy valuation, these factors above lead to a Moderate Buy rating for the stock from analysts and a bullish rating from myself.
Wendy’s Business Strategy for the Future
Wendy’s is a familiar fast food brand for most U.S. consumers of all ages. The company operates the ninth-largest fast-food restaurant chain in the United States and the second-largest globally in the burger & sandwich segment, with over 7,900 stores across the U.S. and 31 other countries. The company operates primarily on a franchise model as it owns just a small percentage (less than 10%) of the restaurants it operates.
Its positioning for growth includes a focus on growing same-store sales, digitally transforming the business, and expanding global operations. Its revenues come from the following major sources — sales at company-owned restaurants and franchise fees, royalties, and other contributions. Product innovation has helped the business remain relevant and growing in the current market environment.
Past Stock-Price Performance
The past decade has been rather lucrative for Wendy’s shareholders, as the company’s share price has increased overall by about 340% (including dividends), significantly outperforming the broader market. That was not, however, without a massive stock price drop in 2020, as the company struggled during the pandemic.
Over the past year, WEN stock has seen a large 21.9% increase despite elevated levels of volatility. Currently, Wendy’s trades at $22.20 per share, just 7% lower than its 52-week highs. The stock also carries a 0.91 beta, indicating that is relatively more defensive compared to the broader market.
Wendy’s Growth Trajectory
After 2020, Wendy’s continued its growth path, increasing its revenue and store count. In 2021 and 2022, the company opened 486 new store locations (net store count increase of 267)
Fiscal 2022 marked the 12th consecutive year of growth in same-store sales for Wendy’s (the second consecutive with double-digit growth). Overall, revenue grew by 10.5% year-over-year, with the company recording a three-year CAGR (compound annual growth rate) of 8%.
Despite strong top-line growth, inflationary pressures have negatively affected profitability. Operating profits have significantly increased since 2020 (from $269.3 million in 2020 to $353.3 million in 2022), even though they have decreased slightly year-over-year. Net profits also recorded a decrease in the same period.
Over the medium term, analysts remain optimistic regarding the company’s financial performance. Sales are expected to increase at mid-single-digit levels through 2025, while EPS growth is expected to accelerate.
The Growing and Competitive Fast Food Market
Despite the fact that fast food restaurants have been around for a long-time, the industry, on a global scale, still enjoys decent growth prospects. The global fast food market is expected to grow at a 6.1% CAGR through 2028 (starting from 2021 as the base), reaching over $1.4 trillion in size. North America holds a large portion of the global market size share, at over $330 billion. When also considering that the burger & sandwich segment remains the most popular among consumers, the overall market trend can be described as favorable for the business.
Digging a little deeper into market analysis, we can see that the burger & sandwich segment also remains relatively affordable, catering to a wider range of consumers by age and geography. Product differentiation and increasing consumer spending toward food represent two major growth drivers for the industry. On the other hand, growing health awareness and a trend towards more healthy meal alternatives are factors that could hinder growth over the next years.
While the fast food industry exhibits some positive growth attributes, it is no secret that the industry is fragmented and highly competitive. Firms compete in terms of pricing, product differentiation, quality, branding, and marketing. Some of the key players in the industry include McDonald’s (NYSE:MCD), Domino’s (NYSE:DPZ), Chipotle (NYSE:CMG), and many other established names, as well as up-and-coming brands.
An Attractive Dividend Yield and Healthy Financials
Despite a large 4.50% forward dividend yield that is undoubtedly very appealing for dividend-oriented investors, Wendy’s distributions to shareholders have been rather volatile over the past decade. However, Wendy’s has recently doubled its quarterly dividend to $0.25 per share, and given its current and forecasted strong financial performance, its dividend appeal is increasing.
Management also reiterated its commitment to enhancing shareholder returns through share repurchases, issuing a $500 million share buyback authorization that is set to expire in 2027.
Additionally, despite a drop in cash production from operating activities, Wendy’s still generated a robust $174.4 million in free cash flow in 2022. Further, the firm maintains a large $676 million cash balance (more than 14% of its market cap) and a very healthy 2.5x current ratio (current assets divided by current liabilities), indicating ample liquidity.
Is Wendy’s Valuation Attractive?
After the significant stock price increase over the past couple of years, Wendy’s valuation multiples have risen far beyond sector averages. Currently, WEN trades at a 22.6x forward P/E multiple, 2.2x trailing-12-months (TTM) price/sales, and a 16.9x EV/EBITDA multiple.
For comparative purposes, a look at valuation multiples for competitors will also indicate whether WEN is overvalued at this time. McDonald’s trades at 25.8x forward P/E, a 9x TTM P/S, and 20.4x EV/EBITDA, while Domino’s trades at a 22.6x forward P/E, 2.3x P/S, and 18.8x EV/EBITDA. Chipotle trades at even higher valuation multiples.
Consequently, despite what initially might appear as stretched valuation multiples compared to market and sector averages, they’re actually normal compared to the valuations of the company’s major peers.
Is WEN Stock a Buy, According to Analysts?
Turning to Wall Street, WEN has a Moderate Buy consensus rating based on nine Buys, 11 Holds, and one Sell rating assigned over the past three months. The average WEN stock price forecast of $25.19 represents 13.5% upside potential, with a high forecast of $29.00 and a low forecast of $21.00.
The Takeaway
After all things are considered, Wendy’s appears to be in a rather advantageous position in the market, given the company’s growth attributes, profitability, and overall prospects. Despite a somewhat elevated valuation, I believe that Wendy’s is likely to perform well going forward, provided that it meets the market’s renewed expectations.
