Just from looking at the way Wendys Co (WEN) stock is trading today, you’d think the company reported a horrendous quarter, slashed guidance and blamed company troubles on the boogeyman.
Not true. The fast-food chain actually managed to beat Wall Street expectations on both earnings per share and revenue, while simultaneously raising full-year 2016 guidance (PDF).
Yet, Wendy’s stock is off 6% in early trading. Go figure.
This isn’t the first time Wall Street has punished a company this earnings season directly following a stellar quarter. Fitbit Inc (FIT) also got mercilessly slammed by traders after its first-quarter report, despite putting up really impressive numbers that no one saw coming.
My point? Warren Buffett likes to say that the market is a tool for an investor to use, not an authority for investors to take notes from. In other words: The market is often wrong, especially in the short-term, and savvy investors should take advantage of that.
With WEN stock, I think investors have just such an opportunity.
WEN Stock: Tough to Imagine a Better Quarter
As Wendy’s battles an onslaught of more recent fast-casual competitors that have caught fire in the last five years or so, it’s still got to put up a fight against perennial nemeses like McDonald’s Corporation (MCD) — which is trading near all-time highs — and Burger King (QSR), as well as Jack in the Box Inc. (JACK), Shake Shack Inc (SHAK) and many others.
That didn’t stop Wendy’s from crushing estimates in Q1. Non-GAAP EPS of 11 cents per share blew past Wall Street estimates for just 6 cents per share, representing an 83% increase from the year-ago period.
Revenue fell 16.2% to $378.8 million, although a slump was expected and that number came in way higher than the $352.1 million consensus. Frankly, Wendy’s just reported one of the more impressive revenue beats we’ve seen all earnings season.
The slump in revenue was simply due to 375 fewer company-owned restaurants being in the mix when compared to the same period last year. This was nothing unexpected: Almost exactly a year ago, WEN announced it would be selling 640 company-owned restaurants in the U.S. and Canada in an attempt to raise cash and “drive further growth opportunities for expanded restaurant ownership to strong operators,” according to former CEO Emil Brolick.
Bear with me. There’s more positive news on the horizon. Management also boosted its full-year EPS guidance from 35 cents to 37 cents, to 38 cents to 40 cents.
Total same-store sales growth (including international stores) came in at 3.4%, although company-owned stores fared better than average, posting 4.8% SSS growth. This was an acceleration from the 3.2% system-wide SSS growth seen a year ago, which is always nice to see.
So, why exactly does WEN stock find itself trading 7% lower on this fine day in May? I can’t say I’m really sure. I will say that shares are already valued pretty fully at 25 times forward earnings, and crazier things have happened than Wall Street’s adoption of a “sell on the news” strategy.
If you’re a long-term investor and you’re looking for a margin of safety with WEN stock, I say wait ’til it hits $9 a pop — just 60 cents above its 52-week low — before buying in. Because in a world on Wall Street where down is up and up is down, short-term sentiment could be bad for a while.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
