Why Wendy's Is Undervalued
Quick-service restaurant chain The Wendy's Co. (NASDAQ:WEN) could deliver further stock growth following its 9% gain over the last year.
Although the wider restaurant industry has an uncertain outlook, the company's ongoing digital investments and its plans to offer breakfast at all of its U.S. locations could catalyze its share price.
Digital investment
Wendy's is currently completing the implementation of its mobile ordering and delivery services. At the end of the second quarter, over 80% of its North American restaurants were listed on a delivery platform, while mobile ordering was available in more than 90% of its U.S. locations.
The fast-food chain's increasing digital presence should resonate with customers as well as increase the size of its total addressable market. Analysts forecast the global online food delivery segment will grow 10% annually between 2019 and 2023, which could act as a catalyst on the company's financial performance.
In addition, Wendy's is planning to have digital scanners in all U.S. stores by the end of 2019, which should lead to increased throughput and boost efficiency. Digital scanners also provide the business with a wide range of data that can be used to refine its products and improve the deals it offers customers.
Increasing customer base
Wendy's will launch a breakfast menu in all of its U.S. locations in 2020. It currently serves breakfast at 300 of its restaurants, so it will invest $20 million and recruit 20,000 additional staff members as part of this planned expansion.
The rollout of its breakfast menu will increase the size of its potential customer base and should provide cross-selling opportunities among existing customers. It could deliver a reliable income stream for the business since breakfast customers typically have relatively high purchasing rates.
As part of its plan to increase net new unit growth in fiscal 2019 to 1.5% of its global restaurant estate, the company opened 28 new restaurants in the second quarter. Since one-third of its new restaurants will be outside of the U.S., it will become increasingly diversified over the medium term. This could reduce its reliance on its home market.
Potential threats
The restaurant industry is facing a severe labor shortage that is pushing wages higher. For the second quarter, for example, Wendy's reported wage inflation of 3.7%.
Increasing levels of illegal immigration enforcement may lead to further challenges for the restaurant sector since it is potentially more reliant on immigrant employees than other industries. Restaurants are being forced to invest in additional staff training and offer financial incentives in order to retain employees, which could increase costs across the industry.
In response to the labor shortage, Wendy's said it is seeking to create a positive work environment for its employees. For example, it is simplifying and eliminating repetitive, non-value-added tasks where possible, which should help to improve its employee retention rate. Additionally, its investments in staff training and credit card processing should reduce waiting times for customers. This could enhance customer loyalty levels and offset a potential slowdown in sales growth.
Outlook
In 2020, Wendy's is expected to record a 27% increase in earnings per share, according to market consensus forecasts. Since it trades with a forward price-earnings ratio of 32, the stock appears to offer good value for money.
Disclosure: The author has no positions in any stocks mentioned.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
This article first appeared on GuruFocus.
