RBC Capital Upgrades Wendy's (WEN) to Outperform

RBC Capital upgraded Wendy's (NASDAQ: WEN) from Sector Perform to Outperform with a price target of $11.00 (from $12.00) saying the company's value offerings have bolstered traffic and should better insulate it from competitor deals.

"We are trimming our price target from $12 to $11 (27x 2017e EPS; 10x EV/EBITDA '17), adjusting for increased sales risk due to a resurgent McDonald's in 2016," analyst David Palmer commented. "This risk is perhaps one reason that Wendy's stock has sold off 20% over the last four months and a peer group of regional fast food chains has re-rated materially lower (e.g., 6+ P/E turns since mid-summer). We believe Wendy's value offerings have bolstered traffic trends and should better insulate it from competitor deals. Accordingly, we are raising our 2015 and 2016 EPS estimates from $0.32 and $0.34 to $0.33 (-3% YOY) and $0.36 (+9% YOY), respectively. Our 3Q SSS growth estimates remain 2%/1.5% (company/franchised) and account for the diminishing lift from Image Activation (170bp lift in 2Q vs. ~50bps in 3Q and 4Q). But we are raising our 4Q SSS growth estimate from 1.5% to 2.5%."

He added, "We believe SSS growth for Wendy’s (along with McDonald’s US) has accelerated nicely in recent weeks as competitors of these two chains likely slowed significantly in October. And while this includes Burger King US, (likely to be confirmed by Carrols's commentary on Tuesday), we believe some of this was promotion timing. Wendy’s outperformance seems to be a result of improving traffic as the chain has launched the 4 for $4 value offering, and partly due to lower discounting from key competitors such as Burger King. Although BK (and likely McDonald's) may push value in future months, we still believe there is upside to our new Wendy’s US SSS estimates of 2.5% in 4Q15e and 2.5% in 2016e. We find it heartening that Wendy’s October SSS growth rates have been stronger in the face of McDonald’s All-Day Breakfast while BK US SSS growth rates have slowed somewhat."

For an analyst ratings summary and ratings history on Wendy's click here. For more ratings news on Wendy's click here.

Shares of Wendy's closed at $9.16 yesterday.

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