Shareholders of Wendy's would probably like to forget the past six months even happened. The stock dropped 31.1% and now trades at $10.69. This might have investors contemplating their next move.
Is there a buying opportunity in Wendy's, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Wendy's Not Exciting?
Despite the more favorable entry price, we're swiping left on Wendy's for now. Here are three reasons why there are better opportunities than WEN and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Wendy’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Wendy’s revenue to drop by 1.9%, a decrease from This projection doesn't excite us and implies its menu offerings will see some demand headwinds.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Wendy’s $4.09 billion of debt exceeds the $281.2 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $543.8 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Wendy's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Wendy's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Wendy's isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 10.9× forward P/E (or $10.69 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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