Wedbush Loses Its Appetite For Wingstop, Downgrades To Neutral

Wingstop Inc WING investors saw their shares gain more than 35 percen in 2017. But some Wall Street analysts are now calling for zero appreciation in the stock throughout 2018.

The Analyst

Wedbush's Nick Setyan downgraded Wingstop from Outperform to Neutral with a price target raised from $36 to $40.

The Thesis

Wingstop will likely see same-store sales growth in the low single digits this year, but the case for being aggressive on the stock no longer applies, as Wall Street's expectations may be too optimistic, Setyan said in the downgrade note. (See the analyst's track record here.) 

Recent firsthand checks suggest the chicken wing restaurant chain will report same-store sales growth of 4 percent, short of the Street's 5-percent estimate, Setyan said. The company is likely to show 2.8-percent same-store sales growth for the full fiscal year, less than the Street's 3.4-percent growth estimate, he said. 

Declining chicken wing prices are no doubt a positive for the company, but the magnitude of the benefit is "negligible," the analyst said. Lower chicken wing prices will likely improve the company's food cost estimate from 40.9 percent of total costs to 39.0 percent in 2018, he said. This will translate to only a 1-cent per-share boost to 2018's earnings per share, Setyan said.

The federal tax cut could boost the company's earnings per share by 11 cents in 2018, but an accounting change around the recognition of initial franchise fees could reduce the EPS benefit by around 5 cents, according to Wedbush. 

Setyan's new $40 price target is based on a 2.5-percent free cash flow yield on approximately $1 free cash flow per share in 2018. This is a "reasonable" premium versus a 4.4-percent average for other franchised peers, the analyst said. 

Price Action

Shares of Wingstop were trading down more than 2 percent at the time of publication Friday and were last seen trading at $39.90. 

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