Morgan Stanley Downgrades Wingstop For Valuation Reasons

After gaining around 80 percent year-to-date, the bullish case for Wingstop Inc WING can no longer be justified for valuation reasons.

The Analyst

Morgan Stanley's John Glass downgraded Wingstop from Overweight to Equal-weight with a price target lifted from $60 to $69.

The Thesis

Wingstop's unit growth and comp outlook remain strong and backed up by an attractive asset-lie business model, Glass said in the note. However, the strong gains in the stock lifted its valuation to 70 times 2019 estimated EPS and more than 40 times next year's EBITDA, which makes it "the most expensive stock" among every restaurant stock Morgan Stanley covers.

Morgan Stanley's revised $69 price target assumes downside from Wednesday's closing price of $73.94 and based on:

• Same-store sales growth of at least 4 percent in 2019.
• Same-store sales growth of at least 3.5 percent over the long-term.
• A systemwide roll out of delivery options
• Unit growth of 12 to 13 percent over the next two years.
• Unit growth of at least 11 percent over the long-term.

A bull-case scenario would value Wingstop's stock at $86, but would require a top-line compounded annual growth rate of at least 13 percent and long-term comp growth of 5 to 6 percent along with a faster pace of unit growth. Bottom line, Wingstop's stock is fully valued at current levels.

Price Action

Shares of Wingstop were trading lower by 2.4 percent Thursday to $72.19.

Related Links:

BTIG Says Wingstop's Stock Has Gone 'Too Far Too Fast'

4 Reasons Why Wedbush Upgraded Wingstop