Restaurant Chain company Wendy's Company is standing out today, surging to $23.08 and marking a 6.0% change. In comparison the S&P 500 moved only 0.4%. WEN is -6.06% below its average analyst target price of $24.57, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Wendy's Company shares have outperformed the S&P 500 by 13.4%, with a price change of 0.7%.
The Wendy's Company, together with its subsidiaries, operates as a quick-service restaurant company. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
Wendy's Company's trailing 12 month P/E ratio is 26.8, based on its trailing EPS of $0.86. The company has a forward P/E ratio of 23.6 according to its forward EPS of $0.98 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the consumer cyclical sector has an average P/E ratio of 24.11, and the average for the S&P 500 is 15.97.
WEN’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Wendy's Company, we obtain a PEG ratio of 2.75, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of Wendy's Company's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
WEN's gross profit margins have averaged 36.0% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 1.9%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Wendy's Company's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ MM) | Capital expenditures ($ MM) | Free Cash Flow ($ MM) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 346 | -78 | 268 | 24.33 |
| 2020-12-31 | 284 | -69 | 215 | 0.43 |
| 2019-12-31 | 289 | -74 | 214 | n/a |
- Average free cash flow: $232,553,333.30
- Average free cash flown growth rate: 12.4 %
- Coefficient of variability (the lower the better): 13.1 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in WEN have received an annualized dividend yield of 2.3% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Wendy's Company's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 11, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Cyclical sector, which stands at 3.11 as of the third quarter of 2022.
With an average P/E ratio, an elevated P/B ratio, and a steady stream of strong cash flows with an upwards trend, we can conclude that Wendy's Company is probably fairly valued at current prices. The stock presents strong growth indicators because of its consistent operating margins with a stable trend, and an average PEG ratio.
