Due to the high visibility of Wendy’s (WEN) earnings, we have opted for a forward PE (price-to-earnings) multiple for our analysis. A forward PE multiple is calculated by dividing Wendy’s stock price from analysts’ earnings estimate for the next four quarters.
Forward PE multiple
Although the stock price of Wendy’s has risen since the announcement of its 1Q17 earnings, its forward PE multiple has fallen as analysts have raised their EPS estimates for the next four quarters. As of August 3, 2017, Wendy’s was trading at a forward PE multiple of 29.3x compared to 30.5x before the announcement of 1Q17 earnings. The initiatives taken by Wendy’s management to improve the quality of food and menu innovations could have compelled analysts to raise their EPS estimate for the next four quarters. On the same day, McDonald’s (MCD), Jack in the Box (JACK), and Restaurant Brands International (QSR) were trading at forward PE multiples of 22.8x, 19.2x, and 27.7x, respectively.
To improve the quality of its food, Wendy’s has invested $30 million in moving towards the usage of smaller chickens, which are more tender and juicier. The company is also using never-frozen beef in its menu items. To enhance the customer experience, Wendy’s has been focusing on image activation of its old restaurants. All these initiatives are expected to raise the company’s expenses. If these initiatives fail to generate expected sales, the increased expenditure could put pressure on the company’s margins, thus lowering its earnings.
For the next four quarters, analysts are expecting Wendy’s to post EPS growth of 28.9%, which could have been already factored into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could bring down Wendy’s stock price and valuation,
Next, we will look at analysts’ recommendations.