AI Investments And New Restaurants Will Improve Future Operations

Key Takeaways

• Accelerated restaurant expansion, tech investments, and digital sales growth support revenue and margin improvements, signaling positive future growth prospects.
  
• Operational optimization and a significant share repurchase program indicate focus on profitability and shareholder value amidst market confidence.
  
• Challenges in sales growth, industry traffic, and commodity inflation, alongside dividend cuts, may pressure Wendy's revenue, margins, and investor sentiment.

Catalysts

Operates as a quick-service restaurant company in the United States and internationally.

• Wendy's plans to accelerate new restaurant unit development, with a target to achieve 2% to 3% net unit growth in 2025, which would be the highest in over 15 years. This expansion is expected to drive future revenue growth.
  
• The company is investing in new technologies, including digital menu boards, AI voice-enabled ordering, and digital kiosks, which aim to enhance customer experience and drive labor efficiency. This is likely to improve net margins and support revenue growth.
  
• Wendy's is focusing on increasing its digital sales mix, which currently stands at 19% globally. Continued growth in this area is expected to boost earnings through higher average checks and improved customer insights leading to more effective promotions.
  
• The company is reallocating resources to operational improvements, including increasing field support for franchisees to ensure consistent quality and efficiency across its restaurants. This operational intensity is aimed at improving profitability and restaurant-level margins.
  
• Wendy's plans to enhance shareholder value by executing a share repurchase program of up to $200 million in 2025, capitalizing on the current attractive stock price and indicating confidence in future earnings growth.

Wendy's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wendy's's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $230.1 million (and earnings per share of $1.22) by about March 2028, up from $194.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, up from 16.0x today. This future PE is lower than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 2.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.22%, as per the Simply Wall St company report.

Wendy's Future Earnings Per Share Growth

Risks

• Closure of underperforming restaurants poses a headwind to sales growth in 2025, potentially impacting revenue adversely.
  
• Expected SRS (same-restaurant sales) to be down year-over-year in the first quarter indicates potential traffic or sales challenges, which could impact revenue forecasts for the year.
  
• Flattened industry traffic in the QSR burger category may result in stagnant customer growth or declining traffic, risking revenue and earning projections.
  
• Anticipated commodity inflation, specifically in beef and bacon, could pressure net margins by increasing costs without commensurate price increases.
  
• The decision to reduce the quarterly dividend reflects significant realignment of financial priorities and risks disappointing investor sentiment, possibly affecting earnings with changes in capital allocations.

Valuation

• The analysts have a consensus price target of $17.467 for Wendy's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $230.1 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 11.2%.
• Given the current share price of $15.47, the analyst price target of $17.47 is 11.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.