Where's The Beef? Street Weighs In On Wendy's Stock

Wendys Co WEN reported first-quarter results, which one analyst says shows "uninspiring" metrics while another says the performance was " comprehensively solid."

The Analysts

Mizuho Securities' Jeremy Scott maintains a Neutral rating on Wendys' stock with a price target lifted from $18 to $19.

Bank of America's Gregory Francfort maintains at Neutral, price target lifted from $19 to $20.

BMO Capital Markets' Andrew Strelzik maintains at Outperform, price target lifted from $19 to $21.

KeyBanc Capital Markets' Eric Gonzalez maintains at Sector Weight.

Wendys closed Thursday's session at $18.81 per share.

Mizuho: Four Key Points

Wendys' earnings includes four key points, Scott said in a research report.

1. North American comps beat expectations at 1.3 percent versus 1 percent and improved to 1.7 percent on a two-year stack;
2. A favorable sales mix helped lift company restaurant margins by 110 basis points year-over-year to 15 percent despite a mid-single digit labor inflation;
3. The company said it exited the Malaysian market and will be re-evaluating its approach to entering other territories; and
4. Despite a strong quarter of operating growth, management kept its full-year EPS and EBITDA guidance unchanged at 61-63 cents and $426-$434 million, respectively.

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BofA: 'Uninspiring' Sales Growth

Wendys' top-line growth in the quarter remains "uninspiring" and continues to lag its peers, Francfort said. On the other hand, the company is showing a new marketing strategy where it's focusing on driving a better mix to generate profitable sales after years of industry-wide margin declines.

The company announced the closure of 20 international units which is "surprisingly high," 14 of which in Malaysia.

Francfort said Wendys buys fresh meat products that represent a quality differentiator but also limits its ability to hedge against price swings. If China moves to increase its 62 percent tariff on meat products, then it's export costs to the Chinese markets could rise notably.

BMO: 'Better Line Of Sight'

Strelzik said Wendys' traffic was negative in the quarter, but the company showed a "comprehensively solid" performance as comps accelerated on a one-year and two-year basis which helped contribute to margin expansion. The company's promotional activity was also "aggressive and well-balanced" and this should continue showing benefits moving forward.

Looking to the back half of 2019, Strelzik said the company is up against easier comparisons which gives a "better line of sight" towards achieving previously communicated 2019 guidance. The company could see incremental contributors to comp growth from digital offerings where it has lagged its peers over the past year but now showing signs of momentum, including improving ratings on the app.

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KeyBanc: International A 'Show-Me Story'

Wendys guided its global unit growth to accelerate from 1.2 percent last year to 1.5 percent this year, which implies around 100 net new units, Gonzalez said. It's not yet clear if Wendys can see similar international success rival Burger King is seeing.

If Wendys succeeds in the international market, Gonzalez said it will help the company notably narrow the free cash flow valuation gap versus other highly franchised restaurant peers over time. The research firm will be visiting Wendys' head office June 13 and says it looks forward to further discussing international expansion plans.