Where's The Beat? Channel Checks Suggest Strong Sales At Wendy's

Analysts at Longbow Research turned bullish on fast food chain Wendys Co WEN after conducting first hand checks and conversations with franchisees. Alton Stump upgraded Wendy's stock from Neutral to Buy with a new $18 price target.

Following conversations and checks with Wendy's franchisees, domestic franchised comps are likely tracking in the 3.0 to 3.5 percent range so far in the third quarter, Stump commented in a note. This estimate happens to come in above a prior estimate of 2.5 percent for the full third quarter and Wall Street's consensus estimate of 2.4 percent.

On a two-year stacked basis, a 3.0 to 3.5 percent comp growth in the third quarter translates to a gain of 4.3 to 4.8 percent, which also marks a 100 basis point acceleration at the midpoint compared to a two-year stack of 3.5 percent in the second quarter, the analyst said.

In addition, the 50-cent Frosty promotion that was offered throughout the summer months likely resulted in a lift of 100 basis points to year-over-year comps for the third quarter, Stump added. Also important to note, the headwind from Hurricane Harvey appears to be "far less than expected" although the final impact is not yet certain.

Bottom line, Wendy's is expected to handily exceed Wall Street's expectations in the third quarter and this trend will likely continue into the fourth quarter. But beyond the two-quarter period, the company's three- to five-year free cash flow story appears to be "of the more impressive" stories within the entire restaurant sector.

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