Goldman Is Buying Wendy's, Downbeat On Brinker & Bloomin' Brands
- Wendys Co (NASDAQ: WEN) shares are up 10 percent year-to-date, while shares of Brinker International, Inc. (NYSE: EAT) and Bloomin' Brands Inc (NASDAQ: BLMN) are down double digits.
- Goldman Sachs’ Karen Holthouse upgraded Wendy’s, downgraded Brinker and removed Bloomin' Brands from its Conviction List.
- There were growing concerns over the casual dining outlook, Holthouse noted.
Analyst Karen Holthouse said, “We see emerging challenges in casual dining, with a steady improvement in traffic trends reversing in October and signs of an increasingly competitive environment that could impact check and margins.”
The 3Q earnings season indicated strong share price sensitivity to top line results. Against this backdrop, “it would be difficult for the broader casual dining group to work,” Holthouse mentioned. She pointed out that the same signs of relative value challenges were visible in fast food, although stocks came under pressure due to concerns over a resurgence of McDonald's Corporation (NYSE: MCD).
“We see opportunities to generate alpha where promotions, product introductions, and the ability to draft off of MCD’s media buy can drive top-line acceleration and upside to numbers,” the analyst added.
Wendy’s: Value In The Product, Attractive Stock Valuation
Analyst Karen Holthouse upgraded the rating on Wendy’s from Neutral to Buy, which raising the price target from $12 to $12.50. The stock has been added to the Conviction List.
Holthouse mentioned that the stock valuation is compelling. Traffic gains garnered by the 4 for $4 promotion “can disprove the thesis that a resurgent MCD means share losses for everyone else.” In fact, the 4 for $4 promotion is expected to result in comp acceleration, estimated at 2.6 percent for 4Q.
The EPS estimates for 2015, 2016 and 2017 have been raised from $0.32 to $0.33, from $0.35 to $0.36 and from $0.41 to $0.43, respectively.
Brinker: Near Term Visibility Low Due to Evolving Strategy
Goldman Sachs downgraded the rating on Brinker from Buy to Neutral, while reducing the price target from $59 to $51.
Holthouse commented, “Our original Buy thesis on EAT relied on strong initial interest in its loyalty program.” While this was expected to drive comp outperformance in FY16, the initial rollout met with obstacles. “We did not fully appreciate traffic/mix tradeoffs vs. couponing and server upselling, and we see fixes coming gradually.”
Moreover, Brinker faces high oil exposure, accounting for more than 30 percent of the company’s store footprint. “Macro in these regions continues to deteriorate on a relative basis vs. company guidance embedding the relative trend improving,” the analyst wrote.
The EPS estimates for FY16, FY17 and FY18 have been reduced from $3.60 to $3.45, from $4.00 to $3.88 and from $4.57 to $4.45, respectively.
Bloomin' Brands: Attractive Valuation, Weak Macros
Holthouse maintained a Buy rating on the company, with a price target of $22. The stock has been removed from the Conviction List.
“We underestimated a deteriorating industry backdrop, how quickly beef could help, a weakening Brazilian currency, and the depths of problems at Carrabba’s and Bonefish,” the analyst said. She added, however, that the stock had become more compelling as the company was a potential M&A candidate.
There were risks to the top-line due to the competitive environment. The EPS estimates for 2015, 2016 and 2017 have been reduced from $1.25 to $1.27, from $1.45 to $1.38 and from $1.68 to 1.61, respectively.
Latest Ratings for WEN
|Nov 2016||Goldman Sachs||Downgrades||Buy||Neutral|
|Nov 2016||Argus Research||Upgrades||Hold||Buy|
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