RBC Puts Wendy's On The Backburner

RBC Capital Markets has downgraded Wendys Co WEN to Sector Perform from Outperform on moderating same-store sales (SSS) trends in the second quarter and July, and less visible SSS drivers, which may limit valuation upside.

RBC now expects SSS growth for the second, third and fourth quarters to be below the company's 3 percent 2016 outlook. RBC cut its second-quarter SSS growth estimate for Wendy's North America to 1 percent (previously 2 percent) as the SSS trends turned flat in July.

Accordingly, the brokerage also cut its 2016 and 2017 EPS estimates each by $0.01 to $0.38 (+11 percent year-over-year) and $0.41 (+6 percent year-over-year), respectively, reflecting annual SSS growth estimates of 1.2 percent and 2.5 percent.

However, the brokerage is confident on the long-term fundamentals of Wendy's.

Related Link: Analysts At RBC Looking At Menu Of Fast Food Stocks

"Although Wendy's appears to be feeling the industry slowdown more than its peers, we believe the chain has the tools in place to recapture its status as a long-term share gainer," analyst David Palmer said.

Palmer pointed out to the programs such as the four for $4 that it can promote alongside higher-end offerings and brand messaging. Further, within the next two to three years, the analyst expects the Wendy's U.S. business to become a very highly franchised (95 percent plus), growing revenue in the mid-single digits with improved free cash flows.

At the time of writing, shares of Wendy's fell 3.08 percent to $9.43. Palmer cut the price target by $1 to $11.

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