Wendy’s (NYSE: WEN) shares have been trapped in a range over the past two years for no other reason than fears its strategy will not work. While the analysts are still in doubt, the company continues to execute and grow the business which is more than 22% greater than it was going into the pandemic. With this in mind, it’s no wonder the insiders and institutions hold so much of the stock because it is undervalued in this market. The stock is trading at only 25X its earnings, high compared to the S&P 500, but low compared to the burger-market leader McDonald’s (NYSE: MCD) which trades closer to 28X its earnings. With growth still in the forecast and the FY22 EPS estimate above the consensus there is a real chance this stock could climb to a post-pandemic high and it pays an attractive dividend, too. 

The Institutions Are Quietly Buying Wendy’s 

The institutional activity in Wendy’s is remarkable because they have been net buyers of the stock for the last 5 consecutive quarters, for 9 of the last 10 consecutive quarters and own about 71% of the shares. Their activity is responsible, in large part, for establishing the solid bottom at $16 and the nearer-term support level at $18.50 and it may help push the stock higher in the near and long term. Owners of the stock include Barclays, Truist Financial, Raymond James and Wedbush which each hold tiny percentages of the company but represent large amounts of private investment capital. 

The inside activity, on the other hand, is remarkable for its lack of activity. The insiders, including major shareholders like Nelson Peltz (director), Trian Fund Management (owned by Peltz) and other board members put in place by Trian are not selling the stock. They’ve not made a sale or a purchase for 5 consecutive quarters and that is a telling story. Trian is listed as owning nearly 12% of the company while Mr. Peltz, as director, personally holds 2.5% of the stock and there are other Trian insiders on the board. This, along with #2 owner Vanguard puts their ownership alone at over 25% which is quite a bit of skin in this game. 

Wendy’s Margin And Breakfast Sales Dazzle

Wendy’s had a mixed quarter but only in regard to the analyst estimates. The company reported $532.6 million in revenue which is down sequentially but up 13.2% over last year. The bad news is the revenue missed by 110 basis points but this is offset by better than expected margin. The strength in revenue was driven by a better-than-expected 6.4% comp in the US that was driven by Breakfast/Daypart sales and a strong 18% increase in International markets. The gains in International markets are noteworthy because the international expansion is central to the company’s growth story. 

The gross margin contracted a bit versus last year due to higher input costs but the shrinkage was less than expected and did not offset the revenue growth. The operating margin expanded, however, on internal improvement and cost leverage and left this year’s EPS up from last year and better than expected. The $0.24 in adjusted EPS is up more than 25% versus last year and beat the consensus by a penny or 420 basis points compared to underperformance on the top line. As for guidance, the company raised its targets for revenue growth and earnings to a range with the consensus estimate at the bottom of the range. 

The Technical Outlook: Wendy’s Builds A Base 

Shares of Wendy’s have been struggling over the last year or so but the long-term charts show this market is building a base of support. Assuming the market follows through on this move, the indicators are set up to fire a strong signal should the price action move up from the 150-day EMA. In that scenario, Wendy’s stock could move up to $22.50 and then $25.00 with relative ease. If not, shares of the stock may be range bound near current levels until more news comes out.