JP Morgan Downgrades Wendy's, Says CapEx Should Have Been Lower

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J.P. Morgan's John Ivankoe has downgraded the rating on
Wendys Co
WEN
from Overweight to Neutral, while lowering the price target from$12.00 to $10.50. Ivankoe believes that the company's previous capex guidance of $150 million over FY17/FY18 is too high, based on an end-FY16 store count of less than 400 and that the capex could come down to $30-$50 million per year if there was robust free cash flow yield. However, Wendys raised its guidance to $160-$180 million for FY17/FY18, although according to the J.P. Morgan report, "capex could/should come DOWN as we find it hard to articulate company operated U.S. unit expansion and more so difficult to agree with $20-25m a year of company funding for franchisee capex in Canada." Ivankoe explained that since this appears to be the strategy of the newly appointed and "well-respected" CEO Todd Penegor, a near term change in the recently announced plan was unlikely. Wendys is now expected to have a company-owned store count of 315 by the end of FY16, from the earlier estimate of 413 stores, based on the guidance, with higher franchise store count of 6,169, up from the earlier estimate of 6,083. "Using the low point of (an unnecessarily high) capex level of $80m for both F17 and F18 leaves us a "simple" net income + D&A - capex FCF of $141m in F17 vs $150-$200m guidance and $156m in F18 vs $200-$250m guidance," Ivankoe added.
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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsJ.P. MorganJohn Ivankoe
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