Wendy's stock bounces back, in wake of downgrade by long-time bull

By Tomi Kilgore

Pricing for fast food to get more competitive as consumers focused on value can spend a lot less buying groceries

Shares of Wendy's Co. bounced back Wednesday, even after a long-time bullish analyst recommended investors stop buying, citing concerns that price competition will grow more intense.

The fast-food chain's stock (WEN) fell as much as 1.8% in morning trading, before pulling a sharp U-turn to be up 0.1% in afternoon trading. The stock had dropped 6.8% in the three sessions since Wendy's reported fourth-quarter results, to close Tuesday at the lowest price since June 22, 2022.

Analyst John Ivankoe at J.P. Morgan cut his rating on Wendy's stock to neutral, after being at overweight for at least the past three years.

He also lowered his price target to $19 from $22, writing the stock is "likely to remain rangebound" as competitive price and capital intensity picks up. The new target implies 5.6% upside from current prices.

Ivankoe said many of the fast-food industry's core consumer base is increasingly focused on value, now that grocery pricing is more than 4.5 percentage points cheaper than prices at limited-service restaurants (LSR) such as Wendy's.

Keep in mind that Walmart Inc. (WMT) said Tuesday in its fiscal fourth-quarter earnings report that food prices have come down in areas such as eggs, apples and deli snacks.

As a result, Wendy's and its competitors, such as McDonald's Corp. (MCD) and Yum Brands Inc.'s (YUM) Taco Bell have shifted back to pre-COVID strategies, including deals for meals or single menu items.

Another concern is the idea of "peak calorie" may be in order after decades of expansion, with "COVID-era indulgence" being matched with the calorie-reducing impacts of anti-obesity drugs.

And despite Wendy's push to go all-in on breakfasts, Ivankoe noted that the it hasn't been able to "drive frequency" for breakfasts with its core customers. He believes Wendy's goal to boost daypart sales by 50% by spending $55 million on breakfast advertising seems "aggressive."

Read: Wendy's is going all-in on breakfast ads, believing that, if you try it, you'll be back.

On the bright side, Ivankoe spoke positively of the Wendy's stock's dividend yield, which was 5.56% at current prices.

That compares with the yields for shares of McDonald's of 2.27%, for Yum Brands of 1.99%, for Burger King parent Restaurant Brands International Inc. (QSR) of 3.06% and the implied yield for the S&P 500 index SPX of 1.44%.

With the downgrade, Ivankoe is now part of the majority on Wall Street. Of the 28 analysts surveyed by FactSet who cover Wendy's, 20 are neutral, while seven are bullish and one is bearish.

-Tomi Kilgore

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02-21-24 1259ET

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