Wendy’s (NYSE:WEN) continues to buck the trend of the pandemic. Fast food stocks would seem to have done well during the pandemic. They remained open for starters. Their business model is made for a contactless experience. The whole industry is based on the idea of grab-and-go.
Yet investment in Wendy’s 12 months ago would give you just a 4% gain today. Granted, there were other bubbles for investors to catch last year, but it’s still somewhat surprising that the stock is so flat.
It could be a case of elevated expectations. The company has been hit miss on earnings. But when they’ve missed it hasn’t been a jaw-dropping number. Perhaps the problem is that the company’s gains haven’t been jaw-dropping either.
I can respect the idea that fast-food restaurants may suffer a little as the economy reopens. Individuals will probably opt to eat at a dine-in restaurant. More fast food may not be the way to go. However, I still think Wendy’s is a good buy on strong fundamental factors.
The Fundamentals Look Good
Same-restaurant-sales (SRS) is a key metric for food stocks. Wendy’s delivered approximately 10% growth in this area. The company managed to open 150 new restaurants during the year and saw its margin growth accelerate.
The company is also seeing growth in its digital sales. Yes, that should have been somewhat easy to do in the midst of a pandemic, but the company did more than double its digital sales in 2020. And they forecast digital to make up 10% of its sales mix by the end of 2021.
Similar digital growth was seen internationally and the company also expects 10% net new growth in 2021.
And one more thing to like from a fundamental perspective, the dividend. Wendy’s increased its dividend recently by two cents per share. And it is committed to maintaining an attractive payout ratio.
Betting on Breakfast
Nutritionists frequently say that breakfast is the most important meal of the day. And increasingly fast-food restaurants are discovering that breakfast is important to their bottom lines. Wendy’s added breakfast to its menu in 2020 and saw it make up approximately 7% of total sales. That’s pretty impressive during a year in which competitors like McDonald’s (NYSE:MCD) saw lagging breakfast sales.
Going forward, the company is projecting 30% growth in the category for 2021, undoubtedly fueled by the return of the morning commute. And the company is forecasting breakfast sales to make up 10% of sales by the end of 2022.
Where’s the Beef?
Sorry I couldn’t resist. However, it was a useful way to mention the beef shortage that did affect many fast-food companies in 2020. That being said, due to growth in its breakfast business and the affection many consumers have for its chicken sandwich, Wendy’s menu was in a good position to capture sales.
Late in 2020, customers began petitioning Wendy’s to create plant-based options. Management is listening. In late February, the company announced the launch of “The Plantiful” burger in Canada. The Canada-first launch is similar to a path taken by McDonald’s.
One of the intriguing elements of this addition is that Wendy’s chose to use an in-house recipe rather than to partner with Beyond Meat (NASDAQ:BYND) or Impossible Foods.
Leaning Into the Right Trends Makes WEN Stock a Buy
Digital sales, a breakfast menu, and now plant-based menu options. These are all trends in the fast food industry that aren’t going away. And that’s why I’m bullish on Wendy’s stock. And the analysts agree. The company is covered by 27 analysts and has a price target of just under $24 per share.
Wendy’s is becoming a familiar buy-on-the-dip candidate post-earnings. You would prefer that the story be different, but a closer look at the company’s earnings show that their numbers aren’t that out of whack with expectations. But when other companies are routinely delivering double-digit beats, it’s hard to look for slow and steady.
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