Wendy's 'Intriguing' 2020 Outlook Overshadowed By Valuation Concerns, Oppenheimer Says

Wendys Co WEN's new set of objectives and targets through 2020 — including the addition of 1,000 locations — are "intriguing" but overshadowed by valuation concerns, according to Oppenheimer.

The Analyst

Oppenheimer's Brian Bittner initiated coverage of Wendy's stock with a Perform rating.

The Thesis

Wendy's outlook through 2020 implies a 75-percent growth in free cash flow to $300 million and requires a system sales acceleration from 3.5 percent to 5 percent, Bittner said in the Monday initiation note. (See the analyst's track record here.)

The third-largest burger restaurant chain guided its same-store sales to grow by 2 to 3 percent annually, but achieving this objective requires the following, Bittner said:

An annual 60-to-70 basis point tailwind from remodels each year.

Momentum from the value menu remaining "highly effective."

Market share tailwinds from the quick-service industry as a whole remaining in place.

Despite an encouraging outlook, the analyst named the following reasons why Oppenhimer cannot justify a bullish stance on Wendy's:

The attractive 2020 targets are already factored into the Street's estimates.

The free cash flow outlook has a "meaningful" dependence on strong same-store sales and unit openings, which implies limited upside surprise potential.

The stock's 7-percent free cash flow yield and 24x P/E on 2019E estimates implies a "well-balanced" stock at current levels.

Investors should be "positively biased" on any "irrational pullback" in Wendys' stock, or if there are any indications of positive free cash flow revisions, Bittner said. 

Price Action

Wendy's shares were up 0.64 percent at the time of publication midday Tuesday. 

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Photo courtesy of Wendy's.