The restaurant industry is filled with several overvalued stocks as investors have stepped up their efforts to look for the next Chipotle Mexican Grill (CMG, Financial). While several stocks in the sector are overvalued, in this article I focus on Wingstop (WING, Financial).
Wingstop is a franchiser and operator of restaurants that specialize in cooked-to-order, hand-sauced and tossed chicken. Despite the company’s slow growth over the past few quarters, the stock has been trading at a premium for quite some time. The company released its quarterly results this week and took a step toward its fair value as the results underwhelmed investors.
Wingstop reported fourth-quarter EPS of 15 cents, beating the analysts’ estimates by 1 cent. On the sales front, Wingstop reported an impressive year-over-year growth of 20.5%, raking in just a little under $25 million. The revenue marginally missed the analysts’ estimates and as a result, the stock was punished in afterhours trading.
Despite Wingstop tanking over 20% in the past few weeks, the stock is still trading at a P/E ratio of over 50. Moreover, the company’s price-sales (P/S) ratio is also hovering around 7, which further highlights the overvaluation of the stock.
Although the company is reporting strong growth, for now, it still has a long way to go before it can grow into its current valuation. It would be unreasonable to expect Wingstop to continue growing at double-digit speed for years to come. The company’s growth will lose pace in the quarters to come, which is why the stock is still overvalued. Although the 40%-plus dividend yield may make the stock seem attractive, the dividend is suspiciously high.
For a growing company to be spending so much on dividends is an obvious red flag and makes for another reason to stay away from the stock.
Conclusion
With revenue growth already slowing down, Wingstop is in for tough times. Moreover, Wingstop is apparently a growing company and for it to have a dividend yield of over 40% shows the management doesn’t believe the company can maintain its growth rate. A growing business needs proper capital allocation, which is why the high dividend yield is a massive red flag.
The timid earnings report may just be the beginning, which is why Wingstop longs should stay cautious. Given the valuation and the headwinds, Wingstop is a definite sell at this point in time.
Disclosure: No position.
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