Perfectly Cooked: Wedbush Turns Neutral On Wingstop After 40% Stock Run

The bullish case for chicken wing restaurant chain Wingstop Inc WING is based on expectations for outperformance across multiple metrics, but is overshadowed by the stock's lofty valuation, according to Wedbush.

The Analyst

Wedbush's Nick Setyan downgraded Wingstop from Outperform to Neutral with an unchanged $74 price target.

The Thesis

Wingstop's near-term prospects remain encouraging according to Wedbush's firsthand checks at 10 percent of all domestic system locations, Setyan said in the downgrade note. (See his track record here.) 

The firm's checks suggest that same-store sales growth for the third-quarter, which the company is set to report Oct. 29, will come in at least in-line with the Street's expectations of 4.1 percent.

For the full year 2018, a low-single digit to mid-single digit average check growth is likely based on a strong value proposition to clients along with new ordering initiatives, the analyst said. 

Exiting 2018, Wingstop should be able to sustain a mid-single digit same-store sales growth rate through 2019, Setyan said.

The restaurant operator appears to be on track to hit its target of 80 percent of all systems having delivery options — which is encouraging, as these units typically see a higher check on average of $5 per order, he said. New unit openings are also likely to come in better than Wingstop's guidance of 12-12.5 percent in 2018 and the Street's 2019 estimate of 12.7 percent, the analyst said. 

Chicken wing cost increases remain "relatively muted," and the potential for higher sales could help the company beat its fiscal 2018 unit-level margin consensus estimate of 30.4 percent, according to Wedbush. 

Despite an encouraging outlook, including expectations for better-than-expected growth in the short- and long-term, Wingstop's 40-percent gain since its second-quarter print in early August implies that the company's upside potential is priced into the stock, Setyan said.

Price Action

Wingstop shares were down 0.66 percent at $70.32 at the time of publication Monday.

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Photo by Ser Amantio di Nicolao/Wikimedia.