Wendy’s Stock Red Hot Into Earnings: Watch the Beef Shortage?ICYMI

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Wendy’s  (WEN) - Get Wendy's Company Report shares may have nowhere to go after earnings and the beef shortage issue isn’t helping. 

Wendy’s reports earnings Wednesday May 6 and the stock is down 15% for the year, worse than the S&P 500’s loss of roughly 12% for 2020. But the stock is up 31% in the past month, crushing the S&P 500’s gain in that time of 8.5%. Wendy’s now trades at 42 times next year’s earnings, the top of its valuation range for the past 5 years and a 50% premium to its average multiple in the span. 

The market has looked past w poor first half of 2020, expecting that the easing of lockdowns, happening in many states this week, will not be met with a reaccelaeration of infections of Coronavirus. Several macro strategists say the consumer, aided by fiscal and monetary stimulus, has been exhibiting a less-severe decline in spending in the past few weeks than many presume. 

Chipotle  (CMG) - Get Chipotle Mexican Grill, Inc. Report, Starbucks  (SBUX) - Get Starbucks Corporation Report and Shake Shack  (SHAK) - Get Shake Shack, Inc. Class A Report all said on their earnings reports that digital sales are somewhat upholding sales and that the past few weeks has shown an improvement in sales momentum. 

Plus, Wendy’s has been a high beta stock in recent years, making outperformance in an up-market an unsurprising. 

But meat processors have recently halted some production in order to protect the health of workers ana meat shortage has taken hold. 

"We remain Buy-rated, but are cautious ahead of the earnings release as recent Buy disruptions in the beef supply chain may create near-term shortages for the company,” wrote Stifel analyst Chris O’Cull in a note. He said his random store checks show that 5% to 10% of stores have menu’s that do not have beef. He didn’t specify what portion of sales beef represents, but he noted his main concern is near-term volatility in the stock rather than any meaningful hit to sales volumes. 

Another potential headwind to earnings regarding the beef situation: lower gross margins. O’Cull said the shortage may spur higher beef prices, pressuring Wendy’s’ cost of revenue. 

Here’s a look at what analysts polled by FactSet are forecasting for Wendy’s’ first quarter:

  •  Revenue: $414M (marginal growth year-over-year)
  •  Same-store-sales: +2.3% (acceleration year-over-year)
  •  Operating margins: 14.2% (262 basis point decline year-over-year) 
  •  EPS: 10 cents (-28% YoY)

The first quarter included January and February, when lockdowns and layoffs hadn’t started. 

The second quarter has only known lockdowns and layoffs. Management likely will not issue guidance, but here’s what analysts expect for the full year of 2020: 

  •  Revenue: $1.65B (-3.4)
  •  SSS:+0.3% year-over-year (deceleration) 
  •  Operating margin: 14.9% (-1.5 basis points) 
  •  EPS: 45 cents (-23%)

One analyst TheStreet spoke with said he is monitoring the size and scope of the beef shortage on Wendy’s’ earnings print. 

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