Citing an “intriguing setup” that now creates an attractive entry point, Oppenheimer analyst Brian Bittner upgraded Wendy’s (WEN) to Outperform on Wednesday as he believes same-store sales appear to have drivers to accelerate into 2019 and the stock's valuation implies a “very attractive upside/downside case.” Not as bullish, his peer at Wedbush downgraded the stock to Neutral as he sees risk to consensus estimates. On Monday, Stifel analyst Chris O’Cull had also cut his rating on Wendy’s shares to Hold, citing a slow ramp in sales growth.
BUY WENDY’S: In a research note to investors, Oppenheimer’s Bittner upgraded Wendy's to Outperform from Perform, with a $20 price target, as he contends that the dynamics of an improved setup are attractive. The analyst said his work reveals an "intriguing setup" as Wall Street's earnings and free cash flow estimates through 2020 have reset to levels that create an improved scenario for "meets or beats," and same-store sales appear to have drivers to accelerate into 2019 against conservative sell-side forecasts of sub-2% perpetually. Further, Bittner argued that new international strategy could unlock faster than expected long-term unit growth, which is yet to be appreciated by investors, and valuation at about 8% free cash flow yield implies “very attractive upside/downside case” against a highly stable financial model. The analyst also named Restaurant Brands (QSR), Domino’s Pizza (DPZ) and Darden Restaurants (DRI) as his 2019 top picks in the sector.
MOVING TO THE SIDELINES: Not as bullish, Wedbush analyst Nick Setyan downgraded Wendy's to Neutral from Outperform and lowered his price target on the shares to $17.50 from $20. Citing his channel checks for the fourth quarter, the analyst said he now believes risk to near-and medium-term same-store sales and margin expectations exists. Further, his checks suggest a system comp slightly below consensus. Nonetheless, the analyst continues to expect updated 2020 free cash flow guidance of at least $275M. Earlier this week, Stifel analyst Chris O'Cull had also downgraded Wendy's to Hold from Buy as he struggles to project upside to the 2019 consensus EBITDA estimate of $447M or argue for a better valuation without greater system sales growth. While the analyst acknowledged the importance of improving SRS performance, O’Cull also said he believes this has limited share appreciation potential. Meaningful share appreciation will depend on whether the company can create an international franchise unit growth machine, he contended. While the analyst sees international as a longer-term system sales opportunity, O'Cull expects it may take a few years to deliver greater system sales growth. He lowered his price target on Wendy's shares to $17 from $19.
PRICE ACTION: In afternoon trading, shares of Wendy’s are fractionally up to $16.33.