Wendy’s stock price has taken a beating over the past six months, shedding 25.6% of its value and falling to $7.05 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Wendy's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Wendy's Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Wendy's. Here are three reasons there are better opportunities than WEN and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning 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 has been shrinking over the last two years as its same-store sales have averaged 1.6% annual declines.
2. Projected Revenue Growth Is Slim
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 rise by 1.3%, a slight deceleration versus This projection doesn't excite us and implies its menu offerings will face some demand challenges.
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 $4.15 billion of debt exceeds the $300.8 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $522.4 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 falls short of our quality standards. Following the recent decline, the stock trades at 12.3× forward P/E (or $7.05 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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