Wendy’s (WEN) is another fast food chain that will feel the pinch of rising wages. Wages have already started to rise in the sector, and as competitive of a market as it is, margins are going to shrink. None of the major fast food chains wants to be the first to hit customers with higher prices, but it will become inevitable. Once one chain does, others will follow, but during the holdout period, chains will accept lower margins in order to keep customer loyalty. With so many fast food options out there, customer loyalty is a huge factor, since a lost customer can be very difficult and expensive and get back. Wendy’s is doing a good job growing earnings, and is expected to grow profits by 22.8% per annum over the next five years, but the strong growth estimates have already been priced into the stock, which trades with a trailing P/E of 22.5 Should higher wages start to eat away at profit margins and result in weaker than expected future earnings growth, the stock will quickly give back its recent gains as Wall Street adjusts its valuation to reflect the lower growth forecasts.
Chart courtesy of www.stockcharts.com