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Here's Why Investors May Find Wendy's (WEN) Appetizing Now

Zacks Equity Research

The Wendy's Company WEN relies on menu innovation, technological upgrades, international expansion and re-imaging of units to drive top-line growth. With a decent share price appreciation, a Momentum Score of A and a Zacks Rank #2 (Buy), the company is currently a profitable investment choice.

Wendy's shares have outperformed the industry so far this year. The stock gained 24.1% compared with the industry’s rally of 19.9%.

Moreover, an upward revision in earnings estimates for 2019 reflects analysts’ confidence in the company’s earnings potential. Over the past 60 days, the Zacks Consensus Estimate for its earnings in 2019 has been revised upward by 3.3%. Further, the company delivered positive earnings surprise in three of the trailing four quarters, the average beat being 6%.


 

Let’s delve deeper into other factors that make this stock a solid pick.

Menu Innovation & Re-Image Programs Aid Top Line

Wendy’s brand transformation initiative includes menu innovation, promotional offers and bold new packaging. Meanwhile, customized sandwiches made on order and hamburgers made of never-frozen beef would continue to drive sales for the company. We expect its solid menu pipeline, limited time offers (LTO), marketing initiatives, and increased emphasis on core and price value offerings to maintain the trend. These, in turn, should help the company to achieve its 2020 target of $12 billion in system-wide sales.

Meanwhile, Wendy’s remains on track to achieve at least 70% of its Image Activation goal as part of the brand transformation initiative. This program has gained traction in the recent past, leading to increased traffic and higher sales at its restaurants. At the end of 2018, 50% of the global system featured the brand’s new image. Interestingly, as a result of this re-imaging, customers have seen some bold designs and friendlier restaurant teams. At the end of the first quarter, 51% of the global system was image activated.

Subsequently, the Zacks Consensus Estimate for the company’s revenues in 2019 is pegged at $1.7 billion, indicating 7.4% year-over-year growth.

Franchising Aids Earnings & Returns

Wendy’s is benefiting from its transition to a franchised business model. In 2017, the company had several first-time builders and doubled the number of franchises from 2015 by building restaurants. Though the reduction in ownership has been weighing on revenues over the past few quarters, we believe franchising a large chunk of its system will lower Wendy’s general and administrative expenses, and thereby boost earnings. Moreover, over the long term, it would generate a higher return on equity by lowering capital requirements. This would also boost free cash flow, thereby enhancing shareholder return.

Resultantly, the consensus estimate pegs current-year earnings at 63 cents, suggesting 6.8% growth from the year-ago quarter’s reported figure. Also, Wendy’s Return on Equity (ROE) for the trailing 12 months is 23.9%, higher than the industry’s 6.6%. This suggests that the company reinvests more efficiently than peers.

Moving forward, the company plans to continue facilitating franchisee-to-franchisee restaurant transfers through its buy-and-flip strategy. This strategy ensures that restaurants are put in the hands of well-capitalized franchisees, committed to long-term growth. In 2018, Wendy’s facilitated 96 Franchise Flips. In 2019, the company expects to complete 100-200 Franchise Flips.

Brand Expansion Bodes Well

Wendy’s is still trying to reach the global restaurant count of 7,500 by 2020. The company expects global net new unit growth to be 1.5% in 2019. Its international business is thus poised to be a growth driver in the future. The company has growth plans and partnerships in Argentina, the Philippines and Japan. Further, Wendy’s has long-term development agreements with franchisees in Singapore, the Middle East, North Africa, the Russian Federation, the Eastern Caribbean, Argentina, Japan, Georgia, the Republic of Azerbaijan, Ecuador and Chile.

In 2018, the company opened 159 restaurants as part of its expansion endeavors, with an increase of 77 net new units. This suggests roughly 1.2% global net new restaurant growth in 2018.

Other Key Picks

Other top-ranked stocks in the industry include Chipotle CMG, Starbucks SBUX and Papa John’s PZZA, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings for Chipotle, Starbucks and Papa John’s are expected to increase 19.2%, 12.8% and 12.5%, respectively.

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