Wall Street Bets Investors Are Bullish Again on Wendy’s. How to Play WEN Stock Amid a Meme Surge Here.

Shares of restaurant chain operator The Wendy’s Company (WEN) gained 25.66% intraday on June 24. However, this surge was not predicated on the company’s fundamentals; it was driven by Wendy’s stock being actively discussed in the WallStreetBets community on Reddit. 

After a new CFO appointment, the stock suddenly became popular in the famous retail trader community, with Vanda Research claiming Wendy’s as the most extreme case of abnormal retail buying on June 25. The short float on Wendy’s has risen to 32.04%, while the short interest ratio shows that short-sellers have 5.92 days to cover. 

Wendy’s previously made news last month when activist investor Nelson Peltz's Trian Fund Management revealed it was seeking investor approval for a potential takeover of the company. Investors welcomed the news, as the stock surged. Trian was reportedly in talks with Middle Eastern investors for buyout funding. 

Against this backdrop of heightened meme interest, we take a closer look at Wendy’s.

About Wendy’s Stock

The world's third largest quick-service restaurant, Wendy’s Company, is a well-known fast-food chain that serves burgers, chicken sandwiches, breakfast items, salads, fries, and its signature Frosty dessert. Based in Dublin, Ohio, the company is popular for its made-to-order menu and strong brand recognition. 

Recently, Wendy’s has focused on improving operations through menu updates, a turnaround plan, and restaurant closures to boost performance. It is also working to expand internationally and strengthen its overall business. The company has a market capitalization of $1.497 billion. 

Wendy’s stock has dropped 36.48% over the past 52 weeks as sales have weakened, especially at existing restaurants, raising concerns about customer traffic and growth. Investors have also worried about inflation in beef and fries, as well as labor costs, and pressure from weaker profitability. 

Due to a meme-stock-like rally with retail traders piling into a heavily shorted name, the stock is up 5.6% over the past three months. Wendy’s shares reached a 52-week low of $6.07 on June 23, but are up 20.76% from that level.

After that steep rise, Wendy’s stock’s 14-day relative strength index (RSI) rose to 61.11, close to the overbought territory, but is presently at 55.99. However, on a forward basis, its price-to-earnings (non-GAAP) ratio of 13.72 times is lower than the industry average of 15.93 times. 

Wendy’s Q1 Results Highlighted Sales Pressure and Turnaround Efforts

Wendy’s reported a 5.5% decreased in global systemwide sales to $3.22 billion in the first quarter. This was driven largely by a 7.3% drop in systemwide sales in the U.S., while the international segment grew by 6%. Global same-restaurant sales dropped by 6.8%. Despite this sales rout, Wendy’s total revenue grew by 3.3% year-over-year (YOY) to $540.64 million. However, its adjusted EPS dropped by 40% YOY to $0.12. 

Wendy’s turnaround efforts seem to be hinged on its international expansion, as the segment continues to post robust sales. The company announced a new franchise deal with an experienced restaurant operator to open up to 1,000 locations in China over the next ten years, extending the brand’s global reach.

Wall Street analysts have tepid expectations about Wendy’s bottom-line trajectory. For the current fiscal year, EPS is expected to drop by 34.1% YOY to $0.58, followed by an 8.6% growth to $0.63 in the next fiscal year. 

Here’s What Analysts Think About Wendy’s Stock

This month, analysts at Stephens maintained an “Equal Weight” rating and $8 price target after the company announced the appointment of Steve Cirulis as the new chief financial officer. Cirulis previously served as CFO and head of strategy at Potbelly Sandwich Works, where he supported a turnaround that included stronger average unit sales, better margins, and higher returns. 

Last month, Argus Research analysts upgraded Wendy’s stock from “Hold” to “Buy” and gave a $12 price target, following the offer from Trian Fund Management. Analyst Christine Dooley also highlighted the stock’s surge following the news. 

Wall Street analysts are taking a cautious stance on Wendy’s stock now, with a consensus “Hold” rating overall. Of the 26 analysts rating the stock, four analysts gave a “Strong Buy” rating, while a majority of 16 analysts are playing it safe with a “Hold” rating, one analyst suggested “Moderate Sell,” and five analysts gave a “Strong Sell” rating. The consensus price target of $7.96 represents an 8.6% upside from current levels. The Street-high price target of $13 implies a 77.4% upside over the next 12 months.

Key Takeaways

The stock surge doesn’t seem to be lasting, as the rise isn't based on any fundamental factors. Moreover, the uproar related to the buyout news seems to have fizzled out. Therefore, with analysts having a tepid view of Wendy’s, it might be wise to observe the stock from afar for now.