About Wendy’s

Many would likely suggest that if for whatever reason, the McDonald’s is closed, Wendy’s is the next best thing.

While I think McDonald’s has pricing, marketing and portions down to a science, Wendy’s brings the flavor and then some.

Baconators are scrumptious and as the cool kids say, the bacon cheese fries hit different.

However, you didn’t click on this article to gain clarification on my thoughts regarding my favorite fast-food establishments. You likely clicked because you wanted to gain a better understanding of whether or not Wendy’s stock is a worthy investment for you and your trusted portfolio.

I’d like to first mention that one of the reasons this company’s stock caught our eyes is because it’s gone through and is currently trudging through some food safety headwinds.

Particularly, Wendy’s has reportedly had an E. coli outbreak involving the lettuce it uses in certain regions, primarily the Midwest. While we hope Wendy’s tends to the situation and takes the appropriate measures to ensure that the food it provides to its customers is safe to eat, we think investors shouldn’t be quickly deterred from taking a look at the company’s stock, especially given that it’s fallen in recent history due to the aforementioned concerns.

When there are current concerns and fearful investors, profits could potentially follow for those who initiate a position in the stock at depressed prices. 

Risk can turn into reward.

Nevertheless, let’s not make any brash assumptions and rather dig into the company’s financials a bit and see if they’re concerning as well.

Wendy’s stock financials

The company’s stock price is down nearly 9% in the past month, currently trading at just north of $19, maintains a price-to-earnings (P/E) ratio of 23.72, a market capitalization of $4.05 billion and distributes shareholders an annual dividend of $2.00.

While according to the company’s P/E ratio the company’s stock is ever so slightly overvalued, it also pays out an impressively high quarterly and annual dividend to its shareholders, making the stock potentially more enticing to prospective shareholders.

As it relates to the company’s P/E ratio, if the company’s P/E ratio was significantly higher than the benchmark of 20 (which indicates that a company’s stock is trading at fair value or what it’s worth), we probably wouldn’t be interested at all in writing this stock analysis article. However, being that the company’s stock appears to be modestly overvalued, we’re interested in considering picking up a few shares as the stock trades closer to fair value or perhaps even lower.

Let’s learn more about Wendy’s to see if this might be a fruitful endeavor. 

According to Wendy’s balance sheet, the company’s breakdown of total assets and total liabilities is fairly standard for the food service industry.

For instance, the company’s executive team oversees just over $5.1 billion in total assets and nearly $4.7 billion in total liabilities.

We were far from surprised by this since the fast food industry and restaurant sector in general is plagued by a long list of cost-related pressures as well as lots of waste. Wendy’s likely has solid relationships with its creditors and franchisees, so we’re not terribly worried about the objectively high total liabilities. Additionally, we take some comfort in this since despite the havoc that COVID-19 and the supply chain mess has unleashed on companies around the world, Wendy’s executive management team has still found a way to outweigh its total liabilities by its total assets.

Something that also makes us confident that the company will be able to consistently pay down its debt over time is its ultra-consistent revenue over the past five years.

Specifically, the company’s total revenue between 2017 and 2022 has floated between $1.2 billion and up to almost $1.9 billion, as reported most recently (2022).

While the restaurant chain would’ve likely been decimated by the initial COVID-19 shutdowns if it hadn’t adapted, the company has strategically fostered a partnership with one of the main leaders in the food delivery space, DoorDash.

This likely allowed Wendy’s to reach its current and perhaps new customers digitally, allowing the revenue to continue flowing in times of turmoil.

We’re impressed by the company’s consistency in revenue, especially in recent years.

What we’re even further impressed by is Wendy’s extraordinarily fortified cash flow during these years.

For example, over the past five years the company has not seen a single year of negative net income which is incredible, given the aforementioned cash (investment) and waste-heavy nature of the industry in which it operates. As a sort of reference, the company’s net income stood at just north of $194 million in 2017, subsequently jumping to $460 million in 2018 and generally remaining between the two figures in the following years.

Additionally, what can also be found on the company’s cash flow statement is their proportionately strong total cash from operations, as in the past five years it’s been positive and typically ranged between around $224 million and $346 million.

Wendy’s stock fundamentals

Churning out a profit in the food service industry isn’t exactly easy, as margins tend to be low since consumer prices are usually low.

Thankfully, Wendy’s seems to have an innate ability at out-profiting the competition.

Notably, the company has a trailing twelve month (TTM) net profit margin of 9.08% compared to the industry’s average of 6.44%, according to TD Ameritrade’s platform.

Although Wendy’s can be considered somewhat of a leader in the industry, it goes up against some vicious competition, some of which include the likes of McDonald’s, Burger King, Taco Bell, Jack in the Box, Wingstop and many others.

To be able to produce a profit at a level of exceeding excellence while brushing up against the aforementioned fellow industry leaders is by no means nothing to scoff at.

Profitability appears to be one of Wendy’s many strong suits.

Finally, while the company’s TTM returns on assets and investment appear to be lacking behind the industry’s average, we’d reasonably hope that as time goes on, the company will inch closer and closer to meeting or possibly beating the competition on these fronts, especially since The Wendy’s Company isn’t that far off from the competition as is. 

Should you buy Wendy’s stock?

Frankly, Wendy’s current core financial metrics are a lot more impressive than we had initially expected. 

As long as the current E. coli scare is resolved in a safe, timely, legal manner, the company continues expanding in its core markets and stays at or ahead of the technology curve, this is one of the few stocks that we wouldn’t mind paying a small premium for.

We give Wendy’s a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.