Wendy’s Earnings: Solid Digital and International Progress Encouraging; Shares Slightly Cheap

We don’t expect to make any material changes to our $21.50 fair value estimate for no-moat Wendy’s WEN after digesting third-quarter earnings. The firm posted solid results, with $551 million in revenue and $0.27 in adjusted EPS edging our $538 million and $0.24 estimates, respectively, but with the firm maintaining its full-year guidance, we expect only a modest upward revision to our prior $2.14 billion and $0.95 diluted EPS full-year estimates. Shares trade at about an 11%-12% discount to our intrinsic valuation after a modest uptick in trading after the release.

The firm continues to progress along its digital learning curve, with digital sales growing 30% globally and comprising 13% of Wendy’s total sales mix—meaningfully behind large competitors like wide-moat McDonald’s (40%) and wide-moat Yum Brands (45%) but progressing in a positive direction. The firm’s loyalty program participation is competitive, with 5 million monthly active users, and should allow the burger chain to remain relevant as restaurant technology continues to disrupt conventional promotional and marketing practices. We’re encouraged by both a sequential acceleration in growth (from 25% in the second quarter) and by a higher digital mix in international markets, which should help defend Wendy’s high-single-digit international systemwide sales growth aspirations abroad.

Within international markets, we continue to view the burger chain as the global bronze medalist (behind McDonald’s and Burger King, a narrow-moat RBI subsidiary) but are encouraged by its recent development agreement with Flynn Restaurant Group to build 200 units in Australia over the coming decade. We continue to expect the chain to roughly double its international footprint in a decade (to 2,100 stores by 2032) but expect tough sledding as the firm competes in smaller, culturally heterogeneous markets where the quality gap between quick-service and full-service restaurants tends to be smaller.