Despite the stock's long history of growth, Wendy's balance sheet should give investors pause
The Wendy’s Company (NASDAQ:WEN) is a popular fast-food chain that operates internationally and is also the parent company of Arby’s, another American fast-food chain. WEN has shown absolutely no growth in the past 12 months and is up only 4% year-to-date in 2020. Nevertheless, the stock has nearly quadrupled off its 52-week low of $6.82 on March 18. As the company reports earnings this morning, we will be take a deep dive into the question of whether the stock still has room to keep pushing upward or not.
The Wendy’s Company has a market cap of $5.18 billion and a book value of $27.81 per share. Its price-to-book ratio stands at 2.16. The company has a trailing price-earnings (P/E) ratio of 45.53 and a forward P/E ratio 32.15. Wendy's P/E ratio at the moment is 48.01.
Not counting this mornings report, Wendy’s has beat expectations on two of its four most recent earnings reports. The company's best performing quarter over the past 12 months was the third quarter of 2019, where it beat expectations by nearly 27%. Wendy's reported an earnings per share (EPS) of $0.19 instead of the expected $0.15. Wendy’s went on to meet expectation for the fourth quarter of 2019 at an EPS of $0.08. For the next quarter (first quarter of 2020), the company missed expectations by $0.01, reporting an EPS of $0.09. Most recently, the company beat their quarterly target by 9% in the second quarter of 2020. Wendy's reported an EPS of $0.12 instead of the expected EPS of $0.11. The company has a trailing 12-month EPS of $0.48.
Wendy’s has grown its revenue by more than $250 million since 2016, but has not been consistent in its annual growth. The company lost more than $200 million in revenues in 2017 before resuming its revenue growth. The company has also been inconsistent with its net income growth over the past four years. In 2018, Wendy’s produced $460.12 million in net income, representing a jump of 236%. The following year, in 2019, the company produced $136.94 million, representing a year-over-year decrease in net income of approximately 70%.
Wendy’s currently has $338 million in cash and $3.81 billion in long-term debt. The company’s balance sheet holds $5.07 billion in total assets and $4.59 billion in total liabilities. The Wendy's Company's total equity stands at $484 million. Wendy’s currently has a dividend yield of 0.92%. The company has paid dividend since 1991. Wendy's last dividend payment paid out at $0.05 per share.
So, the company’s balance sheet isn’t great. Wendy's has very little cash as compared to the amount of debt. In case of another emergency, Wendy’s would find itself in a situation where its equity would turn negative from an increase in debt. In general, a company with such a long history should be in a much better financial position.
Furthermore, Wendy’s has opted to continue paying dividends throughout the ongoing pandemic, although at a lower yield. This could be interpreted as desperation by investors. The Wendy’s Company is clearly in need of liquid assets, yet has refused to entirely cut its dividend in fear of upsetting investors and ruining its dividend history. These concerns could all be signs of weaker-than-necessary company leadership. Overall, investors should be cautious of investing in Wendy’s, especially with its current inflated P/E ratio.