Wendy’s Stock: Tasty Returns In A Frosty Market Environment

The Wendy’s Company (NASDAQ: WEN) remains unperturbed amidst the pandemic and inflationary pressures. It keeps its footing with more solid and intact fundamentals. So, more enticing growth catalysts are anticipated this year. Thanks to its innovation towards customers, crews, and enhanced digital capabilities of its services. Likewise, the stock price indicates a promising future for investors. With its foundations and dividend payments, this optimism makes sense.

Company Performance

Wendy’s Company was able to cushion the unfavorable effects of the pandemic in 2020. Revenue growth went down because of the restrictions that disrupted the supply chain. The limited operations produced more problematic outcomes, as a result. Along with the constraints, the rise in unemployment decreased demand. WEN had to reduce its operations, which caused a 6.04% decline in revenue growth. Still, it was an increase to $1.73 billion from $1.71 billion. Similarly, expenses were cut to keep the core business. As a result, the company was able to raise its margin to 3.09%, or $14.66 million. It remained open all year long. Its resilience allowed it to deal with challenging market conditions.

The operations of Wendy’s Company are more stable now. Its operating revenue of $538 million is a 9.41% year-over-year increase. It has a stronger momentum that highlights its solid business model in a stormy market landscape. For three consecutive quarters, it enjoys a double-digit same-restaurant sales growth of 21%. Aside from the external factors, change starts within itself. It enhances its digital capacity, which is a vital aspect to capture more demand. Note that cashless and virtual transactions are preferred today. As more people adapt to technology, its digitalization becomes a growth engine. Franchise royalty revenue is one of its cornerstones. It is more stable than SRS since royalty fees are more fixed. With the splurge in demand, both segments are speeding up revenue growth.

Even better, it appears to be exceeding pre-pandemic levels as shown by the current revenue trend. It also becomes more efficient as it keeps its costs and expenses low while expanding. Unsurprisingly, sales and profits remain on the rise. The operating margin remains substantial at 17%. Because of the reopening of borders and the loosening of restrictions, its production level is going back to normal.

The thing is, Wendy’s continues to expand its operating capacity while improving its scalability. Its store openings are timely as the demand for restaurants heats up. It is one of the biggest QSR chains in the world, serving millions of customers daily from over 7,040 stores across the globe. It also has more market visibility with 121 store openings in 2021. It is a strategic move in line with the higher spending of Americans on fast foods. On average, an American spends $1,200, which may increase by 2.2% every year. So, the opening of more restaurants may aid in meeting more demand and serving more customers. Given Wendy’s loyal client base and strong brand, it is likely to be achieved.

Currently, Wendy’s Co holds 3.7% of the market share as of Q2 2022. It is a slight increase from 3.5% in the previous year. Its year-over-year revenue growth is lower than the top peers and the market average. It may still have to work on some of its strategies since many of its peers are growing faster. But, the data shows its potential to go head-to-head with other QSRs, especially since it increases its market share. The industry offers more growth prospects it may optimize to stimulate its performance.

Potential Risks and Growth Prospects

Today’s opportunities are greater due to the industry’s unmet demand. Whether in brick-and-mortar or online stores, it creates more strategies to cater to more customers. According to statistics, in the coming years, the global fast food market may reach $998 billion. Fortunately, the business keeps up with changes in the market and customer preferences. These are the potential areas of growth for Wendy’s Co.

But of course, it has to watch out for potential market headwinds. Despite the demand upsurge, inflation remains high despite the slight lull from 9.1% to 8.5%. Restrictions in some countries remain tight. Border reopenings and port congestion improvement are still slow. Also, the geopolitical unrest in Europe is making energy commodities more expensive.

Fortunately, WEN does not seem to relax now. It appears prepared to cushion these potential blows. It continues to expand to bridge the demand gap while increasing its digital scalability. It enhances digital applications and plans to open a new global restaurant design. The digital and new global restaurant standard design element will increase efficiency in addition to attracting more customers. Order processing times may be reduced, and customer satisfaction will rise. Therefore, even though it meets more demand, it might manage to keep expenditures and expenses under control. Hence, Wendy’s Co. should strategically manage its IT spending.

Competitive Advantage And Store Openings

To attract more customers this year, store openings are crucial. Wendy’s already had 121 restaurants open internationally by 2021. It has 121 net new restaurant openings planned for the following six years. Out of the 121 target restaurants, 91 have already been opened as of 2022.

If the operating revenue is divided among all restaurants, the average revenue rises from $253,000 to $273,000 in this case. That is the contrast between things before and after the establishment of the 121 restaurants. WEN can therefore accommodate more diners when additional eateries open and increase demand. It displays the marginal revenue of $82,000 on average for each restaurant. As a result, WEN keeps growing its capacity and expanding into new areas.

The total will climb by 8% to $2.08 billion if we factor in the additional 121 stores. Taking into account the 121 new stores for 2023 and 2024, the operating revenue in 2023 and 2024 may be $2.24 billion and $2.42 billion, respectively. These are still within my projection of 6-8% for the following five years and 8% revenue growth in 2022–2023. Also, it is within the five-year average.

As costs and expenses become more controllable, the operating margin may rise.

WEN Must Watch Out Its Financial Standing

The company’s current ratio is very high as it may indicate a problem with managing its allocation. However, it has a lot of Cash and Cash equivalents to cover its current obligations. Total borrowings increased from $3.8 billion to $4.3 billion. Cash and equivalents also rose from $707.79 million to $886.55 million. So, cash relative to borrowings increased from 19% to 21%. But, it has to do better to keep up with its long-term borrowings. Note that its Net Debt/EBITDA is 7.2x, which is way higher than the ideal ratio.

The business continues to make money, which also aids in meeting its current obligations. Its Free Cash Flow (FCF) of $58.77 million enables us to verify the growing profitability and sustainability. Despite an $18.45 million CAPEX, the FCF-to-Sales Ratio is currently at 0.01%. The business keeps its costs and expenses low as it strives to grow. Now that it has resources, it can pay for its growth and its duties to its stakeholders. I predict that the FCF-to-Sales Ratio will rise to only 12% over the next six years due to the rise in CapEx driven by new restaurant openings. Therefore, the value might increase from $20.66 to $36.41 million.

Stock Price Valuation

WEN has somewhat increased since its dip on May 11. In the last two months, it appears to be moving sideways. At $19.47, the stock price is still lower by 17% than the starting price and 20% higher than the dip. But, it does not appear to be cheap, given its price ratios. It is trading with an earnings multiple of 24-25x, although within the peer average. It is neither too expensive nor too cheap.

Meanwhile, it is an ideal dividend stock, yielding 2.5%. It is even higher than the S&P 400 and NASDAQ components with 2.06% and 1.5%, respectively. Its Dividend Payout Ratio using net income and FCF are 56% and 55%. As such, dividends are well-covered and sustainable. But, investors must be careful since it has a dividend safety score of F. The majority of stocks with the same rating have cut dividends over the past decade. So, relying on dividends alone may not be very safe. To assess the price better, we will use the discounted cash flow (“DCF”) Model, EV/EBITDA, and the Dividend Discount Model.

DCF Model

FCFF 335,000,000

Cash 887,000,000

Borrowings 4,300,000,000

Perpetuity Growth Rate 5%

WACC 9.8%

Common Shares Outstanding $212,781,000

Stock Price $19.47

Derived Value $19.32

EV/EBITDA

EV $7,760,000,000

Net Debt $3,410,000,000

Common Shares Outstanding 212,781,000

Stock Price $19.47

Derived Value $20.44

Dividend Discount Model

Stock Price $19.47

Average Dividend Growth 0.1772722882

Estimated Dividends Per Share $0.50

Cost of Capital Equity 0.2054728224

Derived Value $20.87322676 or $20.87

The result may be mixed, but the derived values are close to one another. It may be an acceptable reason the stock price is moving sideways. There may be little force to sustain the uptrend, so investors must watch the stock price closer.

Bottom Line

Wendy’s Company has already recovered from its slump. Its digital conversion and restaurant openings demonstrate its greater ability to produce income. Because of its successful performance, growth prospects have improved.

Additionally, because cash and borrowings are steady, it can continue to have liquidity. Other things to think about are its consistent dividend payments and the potential increase in stock price. But, the stock price is fairly valued now, which is consistent with its sideways movement. Long WEN, yet investors must wait for a better entry point before making a position. The advice is to hold WEN.