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Time To Clip Wings Of Wingstop

|Includes: Wingstop, Inc. (WING)

WING : Recommendation : Short. Target Price $12-14. Current price $23

Wingstop Inc. (Wingstop) is a franchisor and operator of restaurants that specializes in hand-sauced and tossed chicken wings. The Company offers around 11 flavors on its bone-in and boneless chicken wings paired with hand-cut, seasoned fries and sides made fresh daily. The Company operates business through two segments, which include Franchise segment and Company segment. The Company's Franchise segment consists of its domestic and international franchise restaurants. Its franchise operations segment consists of approximately 693 restaurants, which are operated by its Wingstop franchisees in the United States and five countries outside of the United States. The Company's Company segment consists of Company-owned restaurants, which are located in the United States.

· WING stock is still up in the clouds after a successful oversubscribed IPO in 2015.

· Trades at 10 times trailing EV/Revenue and 29 times trailing EV/EBITDA. At a 12-14% annual revenue growth and 10% operating margin that is high optimism.

· Insiders have dumped the stock in heaps!

Wingstop is the largest fast casual chicken wings restaurant in the world, with a franchise model where 98% of the stores are franchised.WING is traded at a highly premium multiple to its comparable companies - SHAK, BWLD and DNKN.

Given that the growth rates are in low teens, intense competition in the space and a lack of an economic moat, this stock is poised to fall in the low teens to $12-15 per share.

Concentration of restaurants in certain states:

Wingstop is concentrated in California (24%) and texas (35%) which highlight a fierce barrier to expansion in other states. Franchise owners would like to own multiple stores and given the steep initiatial investment of $370K, excluding real estate purchase or lease and labor costs, and a low cash on return of %35. Also, franchise fees from Wingstop are lower for multiple stores. According to the company's 10K

"Existing franchisees accounted for approximately 76% of franchised restaurants opened in 2015 and 2014, which we believe further underscores our restaurant model's financial appeal." Also, the company agrees it takes time and cash burn in initial years - "Our restaurants do not generally experience a "honeymoon" period of higher sales upon opening, but instead typically build year over year"

Potential chipotle style E Coli and noravirus scare:

Investors in any nationwide food chain needs to seriously assign the probability of a 50-60% drop in share prices on the same lines of CMG. Chipotle handled it well because it owned the entire supply chain. WING admits there is little control it has on franchises other than given recommendations. WING only controls the sauces, spice blends

"Company-owned and franchised restaurants purchase their bone-in and boneless chicken wings from suppliers that we designate and approve"

"Chicken is our largest product cost item and represented 69% of all purchases for 2015"

Only flavors are controlled centrally by the company - "We also require franchisees to use our

proprietary sauces, seasonings and spice blends and purchase them and other proprietary products only from designated sources."

Secondary offering

WING offered a secondary offering on behalf of existing shareholders of 5 million shares or 18% of the company. The offer was oversubscribed allowing sale of instead 5.75 million shares at an exorbitant price of $24.

Washing hands in the flowing river were insiders we will list below.

Approximately 3.5 million shares were sold short of total of 28.6 million shares outstanding and float 9.14 million. This secondary offering provides more shares to borrow to short sellers.

Same store sales wobbly:

Same store sales trend show a high interest among customers in the first few years that taper off soon by the third year. This is in-line with expectations because customers are curious of trying a new thing at first. Many customers may not return in a while.

"Domestic same store sales increased 13.8% in 2012, 9.9% in 2013, 12.5% in 2014 and 7.9% in 2015"

Valuation

Company

EV/TTM revenue

EV/EBITDA

Eco Moat

Yrs in business

Avg. spend per customer

Latest SSS

WING

10

29

None

5

>$10

7.9% but downhil

BWLD

1.67

11

None

15

>$10

3.3%

DNKN

8

16

Wide

22

$4.86

1.4%

Source: Yahoo finance and company 10K.

Note: Although WING mentions in the 10k, it is founded in 1994, the franchise model really took off from 2011.

It can be argued that owing to the higher SSS growth rate WING is accorded a higher multiple. However DNKN has a much stronger moat with average spend per customer on par with much stronger names such as Starbucks. WING is also at risk of food borne illnesses. In light of these situations, we apply a generous average EBITBDA multiple of 13 which is in between DNKN and BWLD. There at $95 million of debt on the balance sheet.

At a margin of 37% and $89million of company projected revenue, EBITDA is about $33 million. EV at 13 times EBITDA is $495 million. Minus the $95 million debt, we arrive at market cap of $400 million or share price of $12. Give the food borne sicken possibility of about %5 when the share dive by %70, we arrive at a share price of $11.

Even if we raise the EBITBA multiple to 15, the stock is not worth more than $14.

Insider Selling

 

Sold

New Ownership

%sold

Roark capital

6,354,532

12,765,858

33%

Morrison Charles R (CEO and President)

47,150

62,803

43%

       

Conclusion:

WING is over-valued; headed for a correction. Stock dumps from Long term investor Roark capital and the company CEO at an inflated price, adding to the bloat, is a trigger.

Disclosure: I am/we are short WING.