A Tasty Opportunity For Shares Of Wendy's Shares of Wendy's (NASDAQ: WEN) are moving lower following the Q4 release and we think this is an opportunity to buy into the market. The company's Q4 results and outlook...

Wendy's Moves Lower On Results, Outlook

Shares of Wendy's (NASDAQ: WEN) are moving lower following the Q4 release and we think this is an opportunity to buy into the market. The company's Q4 results and outlook are better than expected, if marginally, and by no means warrant a pullback in share prices. The stock is highly valued trading at 28X its earnings but the company continues to prove its value and we think 2022 will be no exception.

Not only is the company expanding its global footprint but it is deep into a rebranding effort that has been accelerating results and putting upside risk into the outlook. This is reinforced, in our opinion, by the institutional activity which has been net bullish for the last year. The institutions have purchased a net 6.3% of the market cap over the past year and own more than 70% of the company. Those numbers would look very different if there were holes in the growth story.

Wendy's Pulls Back On Strong Results

Wendy's growth story appears to have lost steam in the Q4 period but that is only at face value. The $473.2 million in sales is down -0.2% from last year but this is with the inclusion of 1 less week in Q4 2021 than in 2022. On an adjusted basis, comps are up more than 6.0% in the U.S. and 18% internationally with growth in the forecast for this year as well. Moving down to the income, the margins contracted versus last year but less than expected leaving the GAAP earnings above consensus by a penny.

Looking forward, the company is expecting to see growth in 2022 as well and is guiding the market above the consensus. The guidance for revenue is 6% growth at the low end of the range which tops the consensus by more than $0.10 billion. On the bottom line, the adjusted EPS is expected in a range of $0.87 to $0.91 compared to the $0.89 expected by the analysts which is a little weak given the revenue strength. The takeaways are that 1) the company's earnings and cash flow are greatly improved and fueling a healthy capital return program and 2) we see upside risk in the earnings guidance given our expectation for supply chain issues and cost increases to moderate in the back half of the year.

Wendy's Has A Juicy Capital Return Program

Wendy's pays a nice dividend and buys back shares and has been increasing both as the business improves. The latest dividend increase came just before the Q4 earnings were released and was worth 4% to shareholders. The increase brings the payout up to 2.2% and there is a positive outlook for future increases as well. The company is paying out only 45% of its earnings but we aren't going to hold our breaths. The balance sheet is a little tight in terms of debt leverage and coverage and the company is considering a new debt offering to boot. We don't think the dividend is in danger but we'd look elsewhere for aggressive increases. Until then, investors can count on at least another $100 million in buybacks worth about 2.0% of the market cap.

The Technical Outlook: Range-Bound Wendy's Well Supported

Shares of Wendy's have been range-bound the last few quarters and look like they still are. Price action fell within the range but has found support well within it and above the most recent bottom. It is our expectation the stock will continue to trend sideways until the outlook improves or the results catch up with the current valuation, whichever comes first.