Wendy's Fundamentals Do Not Justify Recent Pressure On Shares: Analyst Says Stock Underappreciated

Wedbush analyst Nick Setyan reiterated an Outperform rating on Wendy's Company WEN, lowering the price target to $24 from $26.50.

Setyan views WEN's current valuation as an overly pessimistic assessment of management's ability to navigate towards MSD-HSD annual EBITDA growth and low- to mid-teens annual EPS and FCF/share growth in 2023 and beyond.

The analyst believes the current buy-side Q3 domestic SSS growth expectation of ~2%, if not slightly lower, is overly downbeat. The current Q3 domestic SSS growth estimate is 3.6%.

Setyan considers the worst-case Q3 SSS growth scenario to be 2.5%, with a more likely outcome in the 3%-3.5% range as trends improved materially as the quarter progressed, and except for the Midwest, all other regions are >3.5%.

The analyst remains optimistic that Q4 domestic SSS growth on a 1-year basis will not be below Q3's, given Q3's comp exit rate, MSD menu pricing, and new menu innovation in Q4.

Like the latter half of Q3, Setyan expects the breakfast daypart to be an outsized contributor to comp and an improving transaction trend.

For now, the analyst conservatively lowers the Q4 company-owned SSS growth estimate to 2.5% from 3.0% and the Q4 domestic franchised SSS growth to 3.0% from 3.5%. This implies a geometric comp vs. 2019 in Q4 of 22.1% vs. 19.7% in Q3 and 19.1% in Q2.

Setyan lowered EBITDA estimates but continues to view the high end of $530-540 million '23 guidance as realistic and model 7.2% growth in '24.

For 2024, while beef inflation will remain a headwind, the analyst thinks it will somewhat be offset by favorable chicken and other basket costs, which should render commodity inflation in 2024 manageable. 

Even with lower menu pricing, Setyan expects higher company margins in '24 (favorable mix and lower U.K. headwinds should also contribute). 

The above comes on the heels of 8.4% EBITDA growth in '23.

Price Action: WEN shares are trading higher by 1.49% to $19.10 on the last checked Wednesday.