Morgan Stanley cuts Wendy's stock rating to Underweight

On Tuesday, Morgan Stanley (NYSE:MS) adjusted its stance on Wendy's (NASDAQ:WEN) shares, downgrading the company's stock rating from Equalweight to Underweight. The firm also reduced Wendy's price target significantly, setting it at $14.00, a notable drop from the previous target of $22.00. The stock is currently trading near its 52-week low of $14.57, though InvestingPro data shows other analysts maintain higher targets ranging from $17 to $29, suggesting potential upside.

The downgrade stems from a cautious perspective on the quick-service restaurant (QSR) sector and specific challenges faced by Wendy's. Morgan Stanley's analysis indicates that Wendy's is not alone in facing these obstacles, which are already reflected in its stock price.

The firm's concerns include potentially slow comparable sales trends, where Wendy's may struggle to maintain momentum gained from limited-time offers due to intense competition in the value segment. Recent financial data shows modest revenue growth of 1.63% over the last twelve months, with the company maintaining a market capitalization of approximately $3 billion.

Additionally, Morgan Stanley pointed out issues with Wendy's unit growth. The company has encountered difficulties in expanding its number of outlets, with closures negating new openings. This trend is expected to persist, particularly in international markets where Wendy's has made progress but lacks a significant catalyst for change in the near term.

Another area of concern highlighted by the firm is the competitive breakfast segment. Despite being a key focus for Wendy's, Morgan Stanley does not view it as a strong driver for comparable sales growth going forward due to the longstanding competitive nature of this market segment.

Morgan Stanley's price target is based on an approximate 10 times the calendar year 2026 EBITDA and about 14 times earnings per share, which is slightly below current levels and at the lower end of historical ranges. The firm acknowledges Wendy's as a fundamentally solid business with a strong cash position and less leverage than in the past. However, for a re-rating to occur, Morgan Stanley believes that Wendy's strategic drivers must become more apparent, and the lower valuation multiples across the franchised QSR group could continue to be a factor.

Worth noting, the company maintains a significant 6.85% dividend yield and has consistently paid dividends for 22 consecutive years. InvestingPro subscribers can access 8 additional key insights about Wendy's financial health and market position through the comprehensive Pro Research Report.

In other recent news, Wendy's reported third-quarter earnings per share (EPS) of $0.25, meeting Wall Street estimates, and a 1.8% increase in global systemwide sales. The company also reported a 0.2% rise in same-restaurant sales and a nearly 40% surge in digital sales, driven largely by the Wendy's app. However, these gains were offset by challenges such as flat adjusted EBITDA margins and a decrease in adjusted earnings per share due to increased investments and higher expenses.

BMO Capital Markets recently raised Wendy's price target from $19.00 to $20.00 and maintained a Market Perform rating. This follows Wendy's decision to allow franchisees to close around 140 underperforming restaurants in the fourth quarter, a move expected to generate nearly $10 million in one-time fees from operators. Despite this, Wendy's revised its full-year guidance, forecasting approximately 3% system-wide sales growth.

Analysts' reactions to these developments have been mixed. Evercore ISI maintained its In Line rating and a $20.00 price target for Wendy's, and slightly increased its 2024 estimated EPS for the company. BTIG maintained a Neutral rating, while Stifel reduced its price target for Wendy's to $18 from $19, maintaining a hold rating on the stock.

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