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Does Wendy’s Valuation Multiple Still Look Attractive?

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Valuation multiple

Wendy’s (WEN) strong first-quarter performance and investors’ optimism about initiatives to drive its SSSG (same-store sales growth) led to an increase in the stock price. The higher stock price raised Wendy’s valuation multiple. As of June 26, the company was trading at a forward PE ratio of 28.2x compared to 27.7x before the announcement of its first-quarter earnings.

In the following graph, you can see that Wendy’s is trading at a higher valuation multiple than its peers’ median. On the same day, Jack in the Box (JACK), McDonald’s (MCD), and Restaurant Brands International (QSR) were trading at a forward PE ratios of 16.6x, 24.5x, and 27.8x, respectively.

On June 26, Wendy’s was trading at 31.1x analysts’ 2019 EPS estimate of $0.63 and at 25.5x analysts’ 2020 EPS estimate of $0.77. The company’s EPS is expected to increase 6.4% in 2019 and 21.9% in 2020.

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Analysts’ recommendations

Since Wendy’s reported its first-quarter earnings, Guggenheim, Citigroup, UBS, BMO, Mizuho, Cowen and Company, Stifel, and Wedbush have all raised their target prices. On June 25, Credit Suisse initiated coverage on Wendy’s with a “hold” rating and a target price of $20. On May 13, Piper Jaffray started covering the stock with an “overweight” rating and a target price of $22.

Overall, analysts are favoring a “buy” rating for Wendy’s. Among the analysts, 55.6% recommended a “buy” rating, while 44.4% recommended a “hold” rating. None of the analysts recommended a “sell” rating. On average, analysts’ 12-month target price for Wendy’s is $20.63, which implies an upside potential of 6.0% from its stock price of $19.50.

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