Wendy’s Co. (WEN) operates quick-service restaurants, with approximately 6,500 franchise and company-owned restaurants in the U.S. and 30 other countries, notes John Staszak, an analyst with Argus Research, a leading independent Wall Street research firm.
The company continues to benefit from new menu items, low single-digit unit expansion, and accelerated investments in its digital business. In addition, to drive growth, management is focusing on reimaged restaurants and smaller, more efficient store formats.
On May 19, Wendy’s reported adjusted 1Q21 earnings of $0.20 per share, up from $0.09 a year earlier and $0.05 above consensus. On a GAAP basis, the company earned $0.18 per share, up from $0.06 a year earlier.
Revenue rose to $460 million from $405 million and topped the consensus estimate of $444 million. The increase reflected higher sales at company-owned restaurants and higher franchise royalties and fees.
The company has raised its 2021 guidance. It now expects revenue growth of 8%-10% (versus a prior 6%-8%), adjusted EBITDA of $455-$465 million (up from a prior $445-$455 million), and adjusted EPS of $0.72-$0.74 (up from $0.67-$0.69). Prior to the earnings report, the consensus had called for EPS of $0.68.
Following the strong 1Q earnings, we are raising our 2021 EPS estimate to $0.78 from $0.70 and our 2022 estimate to $0.94 from $0.90. Our long-term EPS growth rate forecast is 14%.
We expect customer traffic at Wendy’s to continue to recover as vaccines are rolled out and restrictions on dining are eased. We also expect the company to benefit from new menu items, low single-digit unit expansion, and accelerated investments in its digital business.
On valuation, WEN appears favorably valued at 30.2-times our revised 2021 EPS estimate, below the average for small to midcap fast-food chains. We are raising our rating on Wendy's to "buy" from "hold". Our target of $27, combined with the dividend, implies a total potential return of 16% from current levels.
