WEN – LIKE LONG-TERM BUT GOOD NEWS PRICED IN

We are removing WEN from the Hedgeye Restaurants favorites list as a LONG and moving it down to the LONG Bench.  WEN is up 30% year-to-date and 42% over the past 12-months.  The WEN transformation is more than 50% complete and the stock reflects most of good news.  To that point, over the past two years, the EV/NTM EBITDA multiple has expanded from 9.15x to 13.71x, with the stock now trading at the upper end of its peer group valuation. 

 

WEN – LIKE LONG-TERM BUT GOOD NEWS PRICED IN   - Chart 1

 

Our bullish bias to WEN is based on the company’s willingness to transform the business model to a leaner, more efficient machine.  The news today is a further affirmation that this process is nearly complete.  As a whole, Wendy’s new operating model will deliver more predictable earnings growth, higher EBITDA margins, and higher earnings quality, while requiring less capital outlay.  By 2017, WEN will have completed the system optimization initiative, where the company will be generating 80% of its earnings stream from predictable, sustainable, rental and royalty income.  

 

All of this is now baked into the company’s valuation. 

 

WHAT’S NEW TODAY

  • The Board authorized a new share repurchase program for up to $1.4B of the company's common stock (30% of the company's market capitalization through the end of 2016)
  • The company intends to repurchase shares with existing cash on its balance sheet, cash flow from operations, net proceeds of $925MM from its recently completed securitization refinancing, expected after tax proceeds of $350MM from the third phase of its system optimization program and the after-tax proceeds of $50MM from the sale of its bakery operations
  • As part of the new authorization, the company will commence an $850MM share repurchase program today, including a modified "Dutch Auction" tender offer to repurchase up to $639MM of its common stock at a price range between $11.05 and $12.25 per share
  • The tender offer is part of an $850MM stock buyback program, which also includes a separate purchase of up to $211MM of the company's common stock from the Trian Group
  • The company expects to use the remaining $550MM of its $1.4B share repurchase authorization before the end of 2016, as funds become available from the company's system optimization initiative

 

2015 OUTLOOK 

  • The company reaffirmed that its business trends remain on track to achieve the 2015 outlook issued in its first-quarter earnings release on 6-May
  • WEN now expects 2015 Adjusted EBITDA of $375MM to $385MM vs prior $390MM to $400MM and consensus of $400.69MM.  In addition, 2015 Adjusted EPS is now $0.31 to $0.33 vs prior $0.33-$0.35 and consensus $0.34 (excluding $0.02 attributable to its bakery operations)

 

Same-Store Sales

  • Same-restaurant sales growth of 2.5 to 3.0% at Company-operated restaurants and company-operated restaurant margin of 16.5 to 17.0%

WEN – LIKE LONG-TERM BUT GOOD NEWS PRICED IN   - chart 2 upgraded

 

WEN – LIKE LONG-TERM BUT GOOD NEWS PRICED IN   - chart 3 new

 

THE LONG-TERM MODEL

The company's expected restaurant count for its long-term outlook includes sale of 100 Canadian restaurants and the sale of 540 additional domestic by the middle of 2016.  The company's long-term outlook includes the expectation for average annual system-wide same-restaurant sales growth of 2.25 to 3.0% beginning in 2016

 

WEN – LIKE LONG-TERM BUT GOOD NEWS PRICED IN   - Chart 4

 

WEN – LIKE LONG-TERM BUT GOOD NEWS PRICED IN   - Chart 5

 

EPS TARGETS

  • High single-digit Adjusted EPS growth in 2016
  • High teens Adjusted EPS growth in 2017
  • Accelerating to 20% beginning in 2018

EBITDA TARGETS

  • Flattish Adjusted EBITDA in 2016
  • Low-single digit Adjusted EBITDA growth in 2017
  • High single-digit Adjusted EBITDA growth in 2018

The company also continues to expect to achieve the following system goals by the end of 2020:

  • Average unit sales volumes of $2.0M
  • Restaurant margins of 20%
  • A sales-to-investment ratio of 1.3 times for new restaurants

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more