One of the key questions in the Wendy’s (NASDAQ:WEN) growth story is: How does it compare to the historical McDonalds (NYSE:MCD) growth trajectory? And can it ever duplicate that growth? These are questions that investors in WEN stock want to know.
Let’s take a look at the numbers. McDonalds has about 38,000 units in approximately 100 countries, whereas Wendy’s stands at about 6,800 restaurants in 31 countries, with the vast majority of those in the U.S.
Furthermore, in terms of market capitalization, McDonalds is valued at about $175 billion while Wendy’s is only $5 billion.
In the first quarter of 2021, Wendy’s same-store sales grew 13%, although that was up against a weak Q1 2020 of essentially flat growth due to the Covid-19 pandemic. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) grew 35% and adjusted EPS (earnings per share) grew 122%.
Innovative products such as a Jalapeno Popper sandwich, the reinvention of classic chicken sandwich and value-priced $5 biggie bags helped contribute to that strong growth.
Unit Growth Is Essential
Have you seen the drive-thru lines at Wendy’s in the past 12 months? Yes, part of that is Covid related, but some of it is the company’s own marketing efforts and product innovation. The company states global franchise recruiting is on the upswing, with focused efforts in Central Asia and Canada.
WEN hopes to reach about 7,000 units by the end of this year. A top selling point for new unit opening is the addition of breakfast offerings, which would potentially bring higher and quicker internal rates of return.
Taking largely from the McDonalds experience of years past, breakfast offerings could be a game-changer for WEN stock. Breakfast currently accounts for only about 7% of total sales for the company, with a goal of 10% by the end of next year (McDonalds breakfast is roughly 25% of total sales). Those 30% growth rates may be achievable as the company is fully committed to investing in marketing and advertising for the morning customer.
The company remains optimistic going into the rest of 2021. It increased global system sales growth guidance from 6-8% to 8-10% and increased adjusted EBITDA guidance to a mid-point range of $460 million. Mid-point free cash flow guidance was increased from $235 million to $255 million.
So what does the company do with the increased free cash flow? First, it announced a 11% increase in its regular quarterly cash dividend to 10 cents per share. Wendy’s believes that its strong liquidity position, along with the sales momentum it is seeing in its business, supports this increase, while still leaving flexibility to invest in growth.
In addition, the company announced an increase to its existing share repurchase authorization by $50 million for a total of $150 million. This comes after the company exhausted its past authorization due to favorable market conditions.
WEN Stock Valuation
Although its hard to value established restaurant chains at high multiples, WEN stock might be one that deserves its high growth multiple. Currently, WEN stock trades at 31x 2021 consensus EPS estimates and 26x 2022 consensus EPS estimates.
If strong double-digit EPS growth continues for the next three to five years, WEN may be a restaurant stock worth taking a look at.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.