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Why Wendy’s Missed Analysts’ Earnings Estimate in 4Q17

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4Q17 performance

In 4Q17, Wendy’s (WEN) posted EPS (earnings per share) of $0.64. However, after removing one-time or special items, its adjusted EPS was $0.11, which was lower than analysts’ estimate of $0.12. Wendy’s failed to meet analysts’ expectations due to lower-than-expected revenue and EBIT margin.

Compared to 4Q16, Wendy’s EPS rose 37.5% in 4Q17. The expansion was driven by revenue growth, expansion in its EBIT margin, and share repurchases. In the last four quarters, the company repurchased 8.6 million shares for $127.4 million. Share repurchases reduce the number of shares outstanding, thus boosting the company’s EPS. However, some of the growth in Wendy’s EPS was offset by a lower effective tax rate. Its 4Q17 effective tax rate was 39.9% compared to 38.6% in 4Q16.

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Peer comparisons and outlook

During the same period, McDonald’s (MCD), Jack in the Box (JACK), and Restaurant Brands International (QSR) posted EPS growth of 18.8%, 4.2%, and 50%, respectively.

In 2018, analysts are expecting Wendy’s to post EPS of $0.56, which represents a growth of 30.2% from $0.43 in 2017. EPS growth is expected to be driven by revenue growth, expansion of its EBIT margin, a favorable effective tax rate, and share repurchases. At the end of 4Q17, the company had $22.6 million available under its share repurchase program. On February 15, 2018, the company’s board of directors announced a new share repurchase program of $175 million, which will expire on March 3, 2019.

Dividends

On February 15, 2018, Wendy’s board of directors declared quarterly dividends of $0.085 per share to be paid on March 3, 2018, to shareholders of record as of March 1, 2018. The company has declared dividends at a payout ratio of 60.7% and a dividend yield of 2%, given the stock price of $16.88 as of February 23, 2018. The declared dividends represent a growth of 21% from $0.07 in 3Q17.

Next, we’ll look at Wendy’s valuation multiple.

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