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JPMorgan Downgrades Wendy's, Says CapEx Should Have Been Lower

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JPMorgan Downgrades Wendy's, Says CapEx Should Have Been Lower

JPMorgan's John Ivankoe has downgraded the rating on Wendys Co (NASDAQ: 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.

Related Link: Chipotle's Food Safety Issues Beginning To Look A Bit More Serious

However, Wendy's raised its guidance to $160–$180 million for FY17/FY18, although according to the JPMorgan 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 $20–25 million 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.

Wendy's 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 $80 million for both F17 and F18 leaves us a 'simple' net income + D&A - capex FCF of $141 million in F17 vs $150–$200 million guidance and $156 million in F18 vs $200–$250 million guidance," Ivankoe added.

Image Credit: By Ramon FVelasquez - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=29764515

Latest Ratings for WEN

DateFirmActionFromTo
Mar 2021Argus ResearchDowngradesBuyHold
Mar 2021Cleveland ResearchInitiates Coverage OnNeutral
Mar 2021WedbushMaintainsOutperform

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