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Why Wendy's Could Be Undervalued

Wendy's Co (NASDAQ:WEN) has upside potential, in my view, after its 33% stock price decline in the past year.

The quick service restaurant chain has recently started serving breakfast at its restaurants, is expanding its international presence and is improving the design of its restaurants to boost its profitability.

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Breakfast options

The company launched its breakfast menu in March 2020. This follows a two-year preparation period, during which time Wendy's created a differentiated breakfast menu that could increase its market share within the quick service restaurant industry.

The business believes there is strong demand among its customers for breakfast items, according to its fiscal 2019 fourth quarter results. Its breakfast products may also increase its appeal to a broader range of consumers.

In addition, eating out for breakfast is becoming more popular among U.S. consumers. The average American also reported eating breakfast 361 days per year in 2019, which is an increase on the 350 days per year average from 2010. Wendy's exposure to a growing market could catalyze its financial performance.

Restaurant investment

The business is upgrading the interiors of its restaurants to improve the dining experiences for its customers. For example, 58% of its global restaurants now have the company's new design and layout. It expects this figure to gradually increase in fiscal 2020, which could improve the satisfaction levels of its customers.

Additionally, Wendy's is seeking to increase its number of restaurants through lowering their upfront building cost. This may reduce the amount of time it takes for each of the company's restaurants to make a profit and could make it easier for the business to expand its presence into new geographical regions.

International growth

The company plans to double its new restaurant openings in international markets in 2020. It will expand its number of restaurants in the UK and has also signed large development agreements in Canada and the Philippines.

Wendy's expansion into international markets could help to reduce its reliance on the U.S. economy at a time when competition in the quick service restaurant industry is high. This could lower the company's overall risks and enable it to capitalize on growth trends in multiple countries in upcoming years.

Possible risks

The novel coronavirus will likely hurt the company's financial performance in upcoming quarters. It has closed the dining areas of the restaurants that it operates in the U.S. and is urging its franchisees to do likewise. This could lead to lower sales for the business, since only 2.5% of its sales are currently made through its website. Its customers may choose to use its takeaway service, but the overall impact on its financial performance from the closure of its dining areas is likely to be negative.

The company plans to expand its online delivery services in 2020. For example, it has signed agreements with Uber Eats and Grubhub to provide its delivery services to an even wider range of locations. This could broaden its potential customer base and improve its sales performance.

In addition, Wendy's is planning to roll out a loyalty program following its successful pilot in 2019. This could improve repeat business among its customers and also provide data on the purchases made by them. This may allow the business to make relevant recommendations to its existing customers.

Future prospects

Market analysts forecast that the company will report a 7% rise in its earnings per share in fiscal 2020, followed by growth of 23% in 2021. Its price-earnings ratio of 19 suggests that it offers a margin of safety based on its growth potential.

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.