Buy Wendy’s (NASDAQ:WEN) On Post-Earnings Weakness

Wendy’s Is Another Sell-The-News Event

The fast-food rebound is still going strong and yet shares of Wendy’s (NASDAQ:WEN) are falling in pre-market action. The move smacks of sell-the-news based on two things; less-than-stunning results and a moderately high short-interest. That said, there is little in the report to discourage investors looking for long-term growth and dividends. The company says it’s on track to meet goals one of which is sustained top and bottom-line growth. In that light, the pullback in prices looks a little different and maybe offering an entry point for dividend-growth investors.

"In the third quarter we posted our highest Global same-restaurant sales growth performance in over 15 years on top of outsized growth in the prior year." President and Chief Executive Officer Todd Penegor said. "In addition to these very strong sales, our restaurant economic model continues to strengthen, with Company-operated restaurant margin expansion compared to the prior year, despite significant commodity headwinds. We remain focused on our goal of delivering efficient, accelerated growth behind our three major long-term growth pillars: building our breakfast daypart, growing our digital business, and expanding our International footprint.”

Wendy’s Reports In-Line With Expectations

Wendy’s delivered a mixed report for the third quarter of the year but only in comparison with the consensus. The top-line revenue missed the consensus by 0.3%, a very slim margin, but grew 3.3% on a YOY basis. The revenue gains were driven by a 6.1% increase in global comps that are in turn the result of organic gains and higher-than-expected revenue from franchisees. On a segment basis, the U.S. led with an increase of 7.9% offset by a 2.1% decline in Global revenue.

On an operational basis, the company’s margins improved as well. The 16.9% reported is up YOY and more than 100 basis points above the consensus. The widening is due to a higher check average compounded by decreased locally-based advertising spend. In terms of earnings, GAP earrings of $0.17 are in-line with the consensus while adjusted EPS of $0.19 is flat YOY and $0.02 above consensus. The company refrained from giving any guidance but trends are pointing to low to mid-single-digit revenue and earnings growth in the 4th quarter.

Wendy’s Raises Its Dividend, Buys Back Shares

Wendy’s balance sheet isn’t one to boast about but with business rebounding, there is still some wiggle room to be found. The Q3 results were encouraging enough for the company to increase its dividend if not to the level it was before the pandemic hit. The increase is worth 40% of the distribution bringing it to $0.07 quarterly or $0.28 annually. At this level, the stock is paying about 36% of quarterly earnings.

In addition to the dividend increase, the company continues to buy back stocks. Over the past quarter, Wendy’s repurchased 0.1 million shares for a net $2 million leaving about $82 million under the current authorization.

The Technical Outlook: Wendy’s Is Set Up To Move Higher

Looking at the chart, the pre-market action aside, Wendy’s looks like it is set to move higher. The stock has put in at the $21 level, created a higher low, and the indicators are poised to fire a strong buy. That said, the Q3 report has sparked some volatility in pricing that caused a 4.0% drop immediately after the release. The good news is that price action has firmed going into the opening bell suggesting the bulls are still in control. The key level for the near-term will be at the short-term moving average. If price action can get above the EMA we will probably see a new all-time high above $25 be the end of the year.