Wendys Co Stock Is a Smart Order in the QSR Category

In the quick service restaurant category, same-store restaurant sales growth is the single most important metric. It tells investors if each unit is selling more than it did last year, and is a gauge for not only popularity, but also profitability.

With that in mind, let me ask this question: which burger chain has the best same-store restaurant sales track record in recent history?

Wendy's Co (WEN)

The answer may shock you. It’s Wendys Co (NASDAQ:WEN). Wendys has actually reported 19 consecutive quarters of positive same-store sales growth, a record unmatched in the burger category. Meanwhile, the company is re-franchising all its stores, so margins are racing higher. WEN is also expanding globally, opening a ton of new stores in international markets, while redesigning all its old stores to be significantly more modern.

If that all sounds pretty good, it is because it is pretty good. And shareholders have been rewarded. Over the past five years, WEN stock has essesntially tripled from $5 to $15.

I don’t think this run is over. Over the next three years, I think WEN stock heads to $20 and up. Here’s why.

Wendys Is Doing Everything Right to Reward Long-Term Shareholders

When you think about the burger category, you naturally think of the industry giant McDonald’s Corporation (NYSE:MCD). Maybe Shake Shack Inc (NYSE:SHAK) and Habit Restaurants Inc (NASDAQ:HABT) also come to mind because their hyper-unit-growth stories have been pumped up by Wall Street.

Therefore, it’s somewhat surprising to hear that the often-forgotten-about WEN is the burger company with an unprecedented 19 consecutive quarter streak of positive comps. But just because this stock is often forgot about doesn’t mean its not a winner.

Indeed, Wendys is doing everything right to reward long-term shareholders.

I like to say that WEN is getting modern, getting global and getting profitable. On the getting modern front, the company is refreshing all of its old units to be what management calls Image Activation restaurants. Take a look at a photo of these new restaurants. They look pretty sleek. But beyond the sleek appearance, the Image Activation stores are also built for today’s digitally connected world. They offer Wi-Fi, flat-screen TVs and digital menuboards.

Roughly 40% of the current store base is in this Image Activation format. By 2020, management expects that number to grow to 70% and higher. With all these modern store remodels still to come, its very likely that this company’s positive comps streak either persists or even accelerates into 2020.

WEN is also dramatically expanding its global footprint. Unit growth in international markets has been running around 18% per year, and all these new stores are performing quite well. Global system-wide sales growth is 3.7% year-to-date, 70 basis points higher than where it was trending at the same point last year.

Management is targeting 7,500 global units by 2020, up from 6,500 currently. That implies roughly 4%-5% net new unit growth per year into 2020. That level of unit growth coupled with positive comps should drive healthy top-line momentum over the next 3 years.

Lastly, WEN is also getting profitable. Wendys has shifted towards a franchise-heavy business model. That translates into higher margins. Not just on the operating margin front, but also on the cash flow margin side, as well. In an asset-light, franchise-heavy model, capex is low. That means lots of free cash flow. Free cash flow year to date is more than four times greater year-over-year.

Thanks to getting modern, getting global and getting profitable, WEN is giving shareholders nice returns, and I don’t think this will end anytime soon. Management is targeting roughly $340 million in operating cash flow by 2020. I think that is a very doable target thanks to unit growth, store remodels, and an expanded partnership with online food player DoorDash.

WEN stock should easily fetch an average 15 multiple for that $340 million cash flow in 2020. A 15 multiple on $340 million in 2020 cash flow implies a market cap of $5.1 billion, which translates to a price target of about $21 per share.

Bottom Line on WEN Stock

WEN stock has been and will continue to be a solid investment in the QSR category. This stock should trend to above $20 over the next 3 years.

As of this writing, Luke Lango was long MCD.

Article printed from InvestorPlace Media, https://investorplace.com/2018/02/wendys-co-favorable-investment-qsr-category/.

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