Bergman Buy Update: Wendy's Earnings Miss But Better Than Feared

Stock jumps Wednesday morning; shares have nearly doubled since the recommendation.

Author: Gregory Bergman   

In the Covid-19 market, it isn't about meeting earnings--it's about earnings not being as bad as investors fear they could be.

This was Wendy's story today when, despite missing estimates for this brutal first-quarter, the stock jumped. I put a "buy" on Wendy's (Nasdaq: WEN) back in March at $10.94 per share; the stock just hit $20.64 per share, representing a nearly 100% increase. We're selling out the position here, and I advise you do too if you got in under $12. If not, hold the stock for the long haul --but I believe this is a fair value for the stock, and we won't see movement back to its pre-coronavirus high of over $25 until everything is really back in full swing, economically. 

The fast-food company reported 9 cents in per-share earnings from $405 million in sales. Wall Street wanted 10 cents in per-share earnings and $414 million in sales. Instead, Wendy's first-quarter sales rose 1% year over year, down from 5.8% growth reported in the fourth quarter of 2019. 

Still, investors appear to be looking past near-term woes and to the reopening of the U.S. economy. Shares were up about 6% Wednesday morning. Year-to-date, the stock is down about 15% through Tuesday's close.

On Wednesday's earnings call, beef shortages were mentioned after Stephens analyst James Rutherford reported that 18% of Wendy's U.S. locations were out of beef. 

"It is tight out there today," CEO Todd Penegor said on the call. He qualified that by saying that meat is being delivered to restaurants multiple times a week and that the shortage should be temporary.

Wendy's can also remove menu items like beef that are out of stock, focusing on their chicken sandwiches and other popular items like loaded baked potatoes (I'm a chili man myself). 

Wendy's and other fast-food drive-thru businesses should continue to outperform the struggling restaurant industry --and their stocks should too. Even as restaurants open up, customers will continue to be rightfully wary of dining in.