Capitulation In Wendy’s Market After Q3 Results

Wendy’s A Good Buy At This Discount 

The market in The Wendy’s Corporation NASDAQ: WEN had been trying to push the share prices higher for the last couple of months but couldn’t make it happen. There was a high level of expectation built into the stock but lingering resistance related to last summer’s meme-stock rally and crash kept the market range bound. Now, in the wake of the Q3 report, with results good but not great, the bulls seem to be giving up. Capitulating if you will. Throwing in the towel. This could lead to much lower prices but we don’t think so. The post-earnings selloff has shares down more than 8.0%  but also confirming support at the $21 level. We not only think this level will hold as support but that it will lead to a recovery and rally down the road. Wendy’s Q3 results weren’t the stuff to spark major rallies but neither were they cause for such a decline in share prices. 

Wendy’s Has Mixed Quarter 

Wendy’s had a mixed 3rd quarter but the devil is in the details. While the $470.3 million in net consolidated revenue missed the consensus it only missed by 25 basis points. The better perspective is that revenue grew 4.0% versus last year and growth remains in the forecast. The company produced 3.3% in global comps, high single digits on a two-year basis, with an additional 200 basis points of growth from expansion. The company opened up 25 net new stores during the quarter and is well on track to reach its long-term restaurant count targets. Comps were strongest in International markets but the comparisons were much easier. International comps rose by 14.2% while the U.S. footprint saw same-store traffic rise by 3.7%.

Moving down the report, there is some bad news regarding the margins but not as bad as the analysts had expected. The company reported a 250 basis point contraction in gross margin and an increase in SG&A expense that left operating profits down 1.4% from last year. The good news is that GAAP earnings came in as expected despite the revenue weakness while the adjusted $0.19 beat by a penny. 

Wendy’s guidance is a little mixed as well. The company is expecting full-year revenue growth in the range of 11% to 12% which is better than previously indicated but EPS is going to fall short of the consensus. The company is expecting adjusted EPS in the range of $0.79 to $0.80 versus the consensus of $0.82. Regardless, cash flow is up and will remain up on a YTD basis and is supporting the company’s growth and capital return plans. 

Wendy’s Ups Its Repurchase Program 

Wendy’s has been buying back its stock and upped the ante in the Q3 report. The company not only added another $80 million to the current repurchase program but it also initiated an Accelerated Repurchase Program. The company is planning to buy $125 million of its shares during the 4th quarter or about 2.5% of the market cap. Wendy’s is also paying a safe 2.0% yield that comes with some expectations for growth. The company is paying out about 40% of its FCF and is, historically, a dividend grower. 

The Technical Outlook: Wendy’s Hits Support 

Wendy’s fell more than 3.0% at the open and moved lower during the day only to hit support at the $21 level. Support appears to be holding firm at this level and should result in consolidation and an eventual rebound in share prices. The indicators have retreated from recent highs but have not turned bearish or shown signs of reversal so we don’t think a deeper decline is in store. If, however, price action falls below $21 and confirms resistance at that level the stock could fall into the $19 to $20 range.