Back in July 2020, I wrote that relatively unknown fast-casual chicken-wing chain Wingstop (NASDAQ:WING) was the next McDonald’s (NYSE:MCD). Since then, WING stock has largely traded sideways, despite huge gains in the broader market, because valuation friction has put a lid on shares in the near-term.

This valuation friction has now disappeared.

Wingstop recently reported fourth-quarter numbers that broadly missed expectations.

WING stock sunk about 15% on the news. But those numbers were actually pretty good, and zooming out, broadly reaffirmed that Wingstop is still on track to be the next McDonald’s.

In effect, then, the “poor” earnings report just pushed WING stock lower without materially changing the fundamentals.

The result? Wingstop stock is — for the first time in about nine months — materially undervalued.

That means it is time to buy the dip in this up-and-coming fast-food stock.

Here’s a deeper look.

WING Stock: Wingstop Can Be the Next McDonald’s

From where I sit, Wingstop looks like the next McDonald’s.

McDonald’s went from six locations in 1954 to nearly 40,000 restaurants today by doing four simple things.

  1. They sold the right product.
  2. They sold it at the right price.
  3. They sold it in the right format.
  4. And they sold it all through the right channel.

That is, McDonald’s did the following:

  1. Sold hamburgers in the 1960s, at a time when burger popularity was soaring nationally because it was seen as a patriotic American symbol amid the Cold War, and because Americans had started to adopt the idea of barbecues in their backyards.
  2. Sold those burgers for 15 cents …
  3. And sold them in a menu that was very straightforward.
  4. Operated mostly through drive-thru locations, on the heels of the 1956 Federal Highway Act, which paved the way for America to become highly motorized.

Today, Wingstop is following almost identically — and successfully — in McDonald’s footsteps. Consider the following:

  1. Wingstop sells chicken wings, at a time when health-conscious consumers are pivoting from red meat consumption to higher-protein, less-fatty chicken consumption. Over the past decade, U.S. beef consumption per capita has dropped 5%, while chicken consumption per capita has risen 16%.
  2. Wingstop sell those wings at industry-low prices.
  3. The menu is exceedingly simple.
  4. Wingstop sells its wings mostly through digital orders. Even before the novel coronavirus, more than 40% of the company’s sales were digital. Today, that numbers sits above 60%.

Folks, Wingstop has all the right ingredients to be the next McDonald’s. That, of course, is exceptionally bullish for WING stock.

Early Innings of the Growth Narrative

The exciting part is that Wingstop today is essentially where McDonald’s was back in the late 1960s.

Wingstop operates just 1,538 restaurants today. McDonald’s had about that many restaurants back in the late 1960s. Over the subsequent several decades, McDonald’s rapidly grew its geographic footprint, its comparable sales, its revenues, its profits and its stock price.

Wingstop is positioned to do the same over the next few decades.

The company will sustain 10%-plus unit growth for the next 10-plus years. Comparable sales will trend higher at a mid-single-digit rate. Revenues will rise at a 15%-plus pace. Profit margins will expand with economies of scale because of Wingstop’s highly-scalable franchise-focused operating model. Earnings should power higher at a 20%-plus annualized pace.

In other words, Wingstop has a visible opportunity to sustain enormous growth over the next several years and decades, even. That sort of robust growth trajectory lays a promising foundation upon which WING stock should turn into a big long-term winner.

Momentum Is Building

Impressively — and importantly — management is executing flawlessly against the restaurant chain’s long-term opportunity, and momentum today is building, not slowing.

Sure, the company’s fourth-quarter numbers missed expectations. But let’s ignore those estimates for a second, and just look at the numbers.

The number of stores in the system rose 11% year-over-year.

Comparable sales rose more than 18%. Average unit volumes in the system rose about 19%.

Systemwide sales rose more than 26%. Revenues rose 19%.

And, importantly, adjusted profits grew by more than 20%.

Forget the estimates; those are great numbers. And they broadly underscore that Wingstop remains on its “next McDonald’s” growth ramp of steady 10%-plus unit growth, 15%-plus revenue growth, and 20%-plus profit growth.

So long as that remains true, WING stock will continue to look like a long-term winner.

Wingstop Stock Is Undervalued

The good thing about the recent earnings report is that it only changed the WING stock price — and not the fundamentals underlying Wingstop.

Thus, Wingstop stock is now undervalued.

My numbers suggest that Wingstop has visibility to earning about $12 in earnings per share by 2030, based on the aforementioned growth assumptions of sustained double-digit unit growth, 15%-plus revenue growth, and 20%-plus profit growth.

Based on a 25X forward earnings multiple and an 8% annual discount rate, that implies a 2021 price target for WING stock of nearly $170.

That means this stock has about 20% upside potential over the next 12 months.

Bottom Line on WING Stock

Wingstop has “next McDonald’s” written all over it. The problem with WING stock over the past nine months has been a full valuation. That problem is now gone — meaning it’s time to get bullish on this top food stock.

— Luke Lango

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Source: Investor Place