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Wingstop Shares Initiated At Outperform By Wedbush

Wedbush sees 24 percent upside in Wingstop Inc  shares, starting coverage of the stock with an Outperform rating and $35 price target.

Dallas, Texas-based Wingstop is a franchiser and operator of restaurants specializing in cooked-to-order, hand-sauced and tossed chicken wings.

Broad Expectations

"Expect continued upside to current expectations, driven by both SSS growth and margin outperformance. Moreover, we believe the start of recurring special dividends is poised to drive growing awareness of Wingstop's unique business model, and a growing premium to peers," analyst Nick Setyan wrote in a note.

Setyan said the highest franchisee cash-on-cash return of 35–40 percent is understated, and the return figures are set to rise further. Furthermore, the analyst expects the 2016 return could top 50 percent given the 17 percent growth in system AUVs over the last three years.

In addition, new unit AUVs should receive a boost from the planned shift to national advertising, set to occur in 2017. Apart from creating demand in new markets, the move should likewise enhance business in the existing markets.

Further, the analyst said near-term comp drivers include the maturation cycle of new units, mobile/online ordering and increased advertising. In 2017, the comps are likely to benefit further from a potential loyalty rollout and remodels.

The analyst continued that recent checks of 15 percent of domestic locations indicate second-quarter comp growth trending in-line to above 2.5 percent consensus.

More Specific Expectations, Estimates

"We expect Wingstop's compelling ROI to sustain a low- to mid-teens annual unit growth rate towards what we estimate is a >2,500 domestic unit opportunity and >1,000 unit international opportunity," Setyan noted.

Meanwhile, Setyan expects Wingstop's cash generation and minimal capex to result in future recapitalizations similar to the June 30 announcement increasing leverage to 5.2x and paying a special dividend of $2.90/share.

"Assuming all FCF goes to paying down existing debt, and assuming similar adj. EBITDA and FCF growth in FY18, we would anticipate another recap and special dividend around year-end FY18. Assuming a similar step-up in leverage, we estimate the special dividend could be as high as $4.50/share," Setyan highlighted.

For 2016, Setyan expects EPS of $0.56 on revenue of $92.3 million. The Street estimates earnings of $0.54 a share on revenue of $90.4 million.