🗞 Wendy’s Is a Value Trap You DO NOT Want to Fall For

WHILE YOU POUR THE JOE… ☕️

Taiwan Semiconductor stock is starting to collapse… 🐻 

The company just reported its slowest growth rates in 18 months, and they’re not alone.

Coreweave ($CRWV) just lowered its guidance, too, with NVIDIA’s backer Softbank now selling its entire stake in the company. 📉 

If this doesn’t sound like the AI bubble beginning to burst, I don’t know what does.

Either way, watching it all come down won’t do you much good if you:

• Don’t make any money from it

• Take your profits and go back to cash without knowing where to put your capital

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Speaking of things starting to come down, let’s get on with today’s email 📧…

ONE LAST FROSTY
Empty Drive-Thrus

I probably don’t have to tell you this, but in case you haven’t noticed,

Drive-thrus at Wendy’s locations are pretty much empty all of the time, and where there’s a Wendy’s there’s likely a McDonald’s or Taco Bell nearby.

Which, in comparison, are always packed.

Now the food quality (in my opinion) is still the same as always, but people just aren’t going to Wendy’s as much as they used to.

And that got me thinking, is the business doing okay? I mean, you don’t just choose to close up to 350 locations out of the blue if things are going fine.

Let’s dig into the business and find out whether it is, and more importantly, if we can do anything about it… ⬇️ 

Declining Market Share, Earnings Hanging By a Thread

With Wendy’s market share now around 1.3%, compared to Chipotle ($CMG) and McDonald’s ($MCD) who now hold a respective 7.2% and 16% market share of the fast casual restaurant industry.

We can now begin to quantify what is seen in real life, at the drive-thrus and inside the restaurants as well.

Wendy’s is losing market share in real time, and food inflation (plust some minimum wage inflation) is just going to make this whole situation a lot worse.

Now, let’s take a deeper look at what Wendy’s is doing now, seen in the company’s latest quarterly financial data.

• 3.7% decline in same-restaurant sales (major retail KPI)

• 4.7% decline in the United States alone, the brand’s biggest market

• Gross margins declining from 65% down to 62%

This may not seem like much, and most businesses would actually be able to make it out of a growth slowdown and loss in market share like this one.

But,

There’s one problem specifically with the way Wendy’s operates rigth now, a problem that will likely make these issues not only permanent, but also fatal for the brand and its future.

As of the past twelve months, 98% of Wendy’s captial structure is made up of debt.

Over 70% of this debt is concentrated in long-term debt (most of it due in 2030) and capital leases, which are probably seeing a diminishing ROI considering the underperforming locations mounting up.

This means less equity for you as a shareholder (2% equity right now), and interest expenses that will climb higher each time you get a quarterly update.

Not to mention, at some point the company will have to start issuing more debt (or even worse, stock) in order to keep the lights on, and that’s when it all gets ugly in a hurry. 📉 

Now with free cash flows still somewhat attractive in terms of market capitalization, this metric represents a lower and lower share of the company’s revenue.

Which can be explained by a steady contraction in net working capital (current assets - current liabilities), hurting Wendy’s and its ability to react to market conditions without outside financing.

Is There Any Worth to Wendy’s?

We can answer this question in two ways.

• A DCF model

• Comparables valuations

Let’s start by using a DCF model with some base line assumptions, which honestly are optimistic at this point considering where the business is headed:

WIthout this much debt, Wendy’s could actually be worth something, but even if the company were to lay out millions in buybacks, the terminal value of the business is still negative. 🙃 

Which means, this is a worthless company as it stands today, and it would need a refinancing or acquisition miracle if it is to be taken out of its misery.

But wait there’s more:

Even if we treat Wendy’s as a debt instrument (which it pretty much is now), the earnings before interest and tax (EBIT) figures still yield a net value of $4.04 per share.

And that’s assuming an EBIT multiple of 4.6x, which is in line with historical averages.

Here’s what your Furu won’t tell you…

Wendy’s trades at the lowest valuation multiples comapred to other fast casual restaurant chains.

We’ve got discounts in:

• Price to Sales

• Price to EBITDA

• Price to FCF

• Price to Earnings

And I STILL would never look at this and say, what a great buy! 👎️ 

On the other hand, you’ve all been taught to love companies like this one, the ones the rest of the market is dumping left and right and discounting into the ground.

So look,

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Even if we were to assign a premium to P/S and P/EBITDA multiples, we still don’t get anything nearly as attractive.

I mean, best case this stock trades at $6.30 a share, it’s now $8.70…

So please, do yourself a favor and sell this crap, it’ll be a long road down but if they don’t get it together by 2030 we won’t be seeing any more frosty ads during summer time.

For My Gambling Addicts

In my younger days I would be completely willing to go short this company, and there might be some merit to doing so today.

Still,

If you’re thinking of shorting this worthless business, let me at least give you some pointers.

Right now, Volatility for Wendy’s stock is near all-time highs, which surely scares away any potential institutional buyers out of the scene.

So the short momentum and interest is on your side my friend.

However, I would say wait until 1-2 weeks go by, let volatiltiy cool down and see if anyone enters with a big buy (and more importantly, who).

Becuase if a certain institution or wealthy investor buys on a volatility contraction, they might know something about a restructure or takeover that we don’t. 👀 

And that’s a risk you don’t want to take.

See you in our next newsletter, got some more juicy info coming your way.

Until then.

To your success,

G 🫰 

GO AND MAKE IT HAPPEN
Banker’s Work

You’ve probably heard of Seeking Alpha.

Plenty of my ex-Wall Street buds read it each morning scanning for ideas, so do hedge funds and other family offices.

Why?

Because only the best get published, and undergo a rigorous screening process to make sure the information is institution-worthy.

Which is why yours truly is making content there.

Here’s a deeper dive into our Valvoline ($VVV) long pitch if you’re into the high-end finance world ⬇️ 

To your success,

G. 🥃