Fast Food Restaurants

Wendy’s – Intrinsic Value of Stock

Value Investing

Wendy’s is the second largest publicly traded informal eating-out (fast-food) hamburger chain. Its current market capitalization places it around $5 Billion. Therefore, it falls into the mid-cap arena of stocks. At the time of this article’s inception, November 2021, Wendy’s was trading on the NASDAQ at $23 per share. Its intrinsic value is a little less than half the market value and a value investor’s buy point is around $8 per share. The company does pay a small dividend. Current dividend yield is slightly less than 2%. Overall, the company is profitable but stagnant related to growth. Stated succinctly, Wendy’s is nowhere near worth a current market value of more than $20 per share. 

This company runs the industry financial model commonly used with other fast-food restaurant chains. It has three revenue and expense segments of operations. The first and core segment is the traditional corporate owned locations. Wendy’s has 361 company owned stores. As such, they have a traditional profit and loss calculation associated with this segment. A second segment and the real driving force of profit is the franchising arm of the company. There are 6,467 franchisees, with corporate owned stores, Wendy’s totals 6,828 restaurants. This segment is driven by the 4% franchise fee placed on all sales of the franchisees. Similar to McDonalds, the core source of profitability stems from the franchising aspect of operations. A third and not as profitable as franchising is the real estate arm. Just like McDonalds and other well managed restaurant chains, Wendy’s negotiates long-term leases of property in ideal locations and in turn negotiates beneficial long-term leases with franchisees to pay rent for the use of that land. The franchisee uses their capital to build the store, equip it and initiate operations at that site.

Shake Shack – Intrinsic Value of Stock

Shake Shack Intrinsic Value

One of the members of the informal eating out industry, fast-food restaurants, is Shake Shack. Shake Shack is one of the few fast-food restaurants that sells beer and wine at a limited number of its locations. The company is relatively young by any business standard opening its first restaurant back in 2001 and going public in 2014. Thus, the company does not qualify as a value investment opportunity but is used as a comparative tool in this site’s Value Investment Fund’s Fast-Food Restaurants’ Pool.

In general, Shake Shack’s market price is several times greater than the company’s intrinsic value. It is trading at this high price purely on conjecture that it will morph into the next McDonald’s. Based on its business plan, historical earnings, and capital raising capacity; it will take every bit of twenty (20) years to justify the current market price – trading at more than $70 per share (November 2021). No value investor in their right mind would spend $70 plus on hope. It is simply irresponsible.