Earnings

Critical Comparison: Wingstop Inc. (WING) vs. J. Alexander’s Holdings, Inc. (JAX)

Wingstop Inc. (NASDAQ:WING) shares are up more than 33.56% this year and recently increased 0.84% or $0.33 to settle at $39.52. J. Alexander’s Holdings, Inc. (NYSE:JAX), on the other hand, is down -6.51% year to date as of 11/21/2017. It currently trades at $10.05 and has returned -1.95% during the past week.

Wingstop Inc. (NASDAQ:WING) and J. Alexander’s Holdings, Inc. (NYSE:JAX) are the two most active stocks in the Restaurants industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect WING to grow earnings at a 17.60% annual rate over the next 5 years.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 3% for J. Alexander’s Holdings, Inc. (JAX). WING’s ROI is 26.10% while JAX has a ROI of 6.50%. The interpretation is that WING’s business generates a higher return on investment than JAX’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. WING’s free cash flow (“FCF”) per share for the trailing twelve months was +0.16. Comparatively, JAX’s free cash flow per share was +0.19. On a percent-of-sales basis, WING’s free cash flow was 0.01% while JAX converted 0% of its revenues into cash flow. This means that, for a given level of sales, WING is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. WING has a current ratio of 0.90 compared to 0.60 for JAX. This means that WING can more easily cover its most immediate liabilities over the next twelve months.

Valuation

WING trades at a forward P/E of 49.65, and a P/S of 11.44, compared to a forward P/E of 22.33, a P/B of 1.43, and a P/S of 0.65 for JAX. WING is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. WING is currently priced at a 7.77% to its one-year price target of 36.67. Comparatively, JAX is -28.21% relative to its price target of 14.00. This suggests that JAX is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for WING and 1.00 for JAX, which implies that analysts are more bullish on the outlook for WING.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. WING has a short ratio of 18.83 compared to a short interest of 2.51 for JAX. This implies that the market is currently less bearish on the outlook for JAX.

Summary

Wingstop Inc. (NASDAQ:WING) beats J. Alexander’s Holdings, Inc. (NYSE:JAX) on a total of 7 of the 14 factors compared between the two stocks. WING is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, WEN has better sentiment signals based on short interest.

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