Dear Reader,

Just like a perfect meal balances flavors, successful investing is about finding companies that blend growth potential with strong fundamentals.

Today, I want to share a company that’s capturing attention not only for its flavor but for its potential to deliver robust returns. With rapid growth, an asset-light model, and a focus on shareholder value, this company has positioned itself as a unique investment opportunity in a competitive industry.

Introducing Wingstop (NASDAQ:WING)—a fast-growing restaurant chain that’s redefining quick-service dining with its bold flavors and innovative strategy.

I hope your week has been great! It’s the second Sunday of October, which means it’s time for this week’s stock pick. So, grab a coffee, and let’s dive in.

What Is Wingstop? Wingstop is more than just a chicken wing restaurant—it’s a flavor-filled experience that has captured the hearts of fans around the world. Starting in a small test kitchen in the 1990s, Wingstop has grown into a fast-casual powerhouse with over 2,300 locations globally. Known for its fresh wings and bold flavors like Mango Habanero and Lemon Pepper, Wingstop distinguishes itself through quality and a seamless customer experience supported by digital innovation.

Wingstop operates primarily through a franchise model, which allows for rapid expansion without the heavy capital burden of company-owned stores. This asset-light approach not only reduces operational risks but also enables franchisees to invest more into their locations, fostering a network of successful restaurants that contribute to Wingstop's overall growth.

🍗 Wingstop’s Recipe for Success

Strong Unit Economics

Wingstop’s asset-light franchise model delivers some of the best unit economics in the industry. Franchisees enjoy cash-on-cash returns exceeding 70%, with new locations typically paying back their investment in under two years. Restaurant-level margins have reached as high as 25%, driving strong profitability across the network.

Accelerating Expansion

Wingstop’s growth trajectory is remarkable. With over 300 new restaurants added in the past year, the chain continues to scale at an impressive pace. Management is targeting up to 300 more openings in 2024, with a long-term goal of 7,000+ global locations. What’s truly unique is Wingstop’s 20 consecutive years of same-store sales growth—a track record of consistency in the competitive restaurant industry.

Digital Leadership

With 68% of sales coming from digital channels, Wingstop’s digital strategy is a key growth driver. The MyWingstop app, boasting over 45 million users, enables data-driven marketing and personalization, boosting customer engagement and sales. This digital-first approach taps brilliantly into the convenience trend, setting Wingstop apart.

Operational Efficiency

Wingstop leverages its scale to negotiate favorable input prices while investing in technology and supply chain improvements to enhance efficiency. Analysts project that EBITDA margins could expand from 33% to over 40% by 2026, reflecting ongoing operational improvements.

Shareholder-Friendly Capital Allocation

Wingstop is committed to returning value to shareholders, evidenced by a 23% dividend increase in Q2 2024 and continued share buybacks. Its robust cash flow supports both growth and shareholder returns.

🚨 Risks to Consider

High Valuation

Compared to Peers At a price-to-sales (P/S) ratio of 19x, Wingstop’s valuation is steep relative to peers like McDonald’s, which trades at 8.1x. This premium pricing signals high expectations for growth; any disappointment could lead to a significant correction.

Debt Load and Store Valuation

Wingstop has $771 million in debt, resulting in negative shareholder equity. Additionally, its per-location valuation of $5.64 million exceeds that of McDonald’s, despite generating lower revenue per store. This disparity raises questions about the sustainability of its growth model.

Rising Input Costs

Chicken wing prices have jumped 30% recently, potentially squeezing margins. Historically, higher input costs have slowed Wingstop’s share price momentum, highlighting a vulnerability to commodity price fluctuations.

Potential for Slowing Growth

While the company has delivered impressive growth, maintaining a 20%+ growth rate indefinitely is challenging. Any slowdown could pressure the stock’s valuation.

🧪 How Does Wingstop Score on MonkStreet?

Now, let’s bring in some data-driven insights from MonkStreet, my quantitative investing tool. MonkStreet uses the MonkScore® to evaluate companies based on five factors: growth, profitability, financial health, shareholder friendliness, and valuation. Here’s how Wingstop stacks up:

Growth (91st Percentile): Wingstop scores high for growth, with a 32% year-over-year increase in revenue and a 50% rise in net income. Store expansion and same-store sales growth drive these impressive metrics. Strong free cash flow (+64%) also supports reinvestment in growth initiatives.

Profitability (97th Percentile): The company’s asset-light model contributes to high profitability, reflected in returns on assets (ROA) of 20% and returns on invested capital (ROIC) of 36%. These metrics indicate efficient use of resources, with franchisees shouldering much of the operational risk.

Health (91st Percentile): Wingstop’s financial health is solid despite significant debt, with strong liquidity metrics (82nd percentile for quick ratio, 81st for current ratio) and a low default risk (2.6%).

Shareholder Friendliness (68th Percentile): Shareholder returns are notable, with active buybacks and dividend hikes. The dividend yield (0.26%) and buyback yield (1.49%) indicate a commitment to returning capital to shareholders.

Valuation (11th Percentile): While the stock appears expensive, its strong growth prospects and profitability metrics justify a premium valuation for growth-oriented investors. The relatively favorable PEG ratio (87th percentile) further supports this view.

Verdict: Very Likely to Beat the Market! (MonkScore 94/100) Wingstop isn’t just serving wings; it’s dishing out a compelling growth story fueled by digital innovation and a scalable franchise model. While the high valuation warrants careful consideration, the company’s strengths in unit economics, expansion, and shareholder returns make it a promising long-term play for investors who can stomach potential volatility.

3 Important Things About These Emails

1. Success Rate: Let’s set the record straight from the beginning—not every stock I pick will beat the market. I estimate around 60% will deliver positive results, and that should be enough to beat the market.

2. Selection Process: I’m not personally investing in each and every one of these stocks. These picks are mostly driven by quantitative analysis and may not always pass my qualitative tests.

3. Accountability: I’m committed to full transparency. You can track how my picks perform in real time here, and judge my recommendations for yourself.

Have an amazing week and… happy investing!

P.S. If you enjoyed this analysis, share it with a fellow investor who loves discovering high-growth opportunities!