by Tom Taulli | April 4, 2012 2:10 pm
Wendy’s (NASDAQ:WEN) overtook Burger King as the No. 2 hamburger chain in the U.S. last year, with sales reaching $8.5 billion last year over BK’s $8.4 billion.
Of course, both figure pale in comparison to global goliath McDonald’s (NYSE:MCD), which posted sales of $34.2 billion.
Unfortunately, Wendy’s has not been able to ride the good news to any stock momentum, with WEN shares shedding more than 5% year-to-date vs. an 11% gain for the S&P 500.
So might now be the time to look at Wendy’s for stock value? Let’s take a look at the company’s pros and cons:
Reinvention: Wendy’s has taken some steps to improve its menu, such as with its Dave’s Hot ‘N Juicy cheeseburgers and the Asiago Ranch Chicken Club. These offerings helped to boost same-store sales in the fourth quarter, at a tune of 5.1% for company-owned stores and 4.1% for franchisees.
Better Store Experience: This is important to help sustain growth. To this end, Wendy’s plans to invest $80 million this year to upgrade its stores. The initiative will involve new equipment, such as a point-of-sale system, as well as support programs for new products.
Buyout Potential: If Wendy’s stock does not get traction, then a going-private transaction seems likely. Keep in mind that private equity has had a field day with Burger King, which already has pulled off two such transactions over the past decade and recently announced plans to go public yet again, putting more coin in 3G Capital’s pocket. It’s also worth noting that Trian Partners, helmed by legendary takeover player Nelson Peltz, owns a majority of Wendy’s stock.
Competition: It’s fierce. Besides the national chains like McDonald’s and Burger King, there are also various strong regional operators, such as Jack in the Box (NASDAQ:JACK), not to mention other fast-food chains like Yum Brands‘ (NYSE:YUM) Taco Bell and KFC. The crowded space means pricing is low, which has put pressure on margins.
Debt: Wendy’s has $1.3 billion in debt, which requires $114 million a year in payments, so a fall-off in cash flows certainly could be a big problem.
Commodity Inflation: This has been a major issue for Wendy’s. Consider that beef prices have been strong, especially because of demand from global markets. The growing wealth in emerging markets has meant a change in dietary habits.
Wendy’s new CEO, Emil Brolick, has a strong background, including a stint as chief operating officer at Yum Brands. He has put together a solid turnaround plan, but it will take awhile to get traction.
The stock price has been depressed — and seems to have reached a floor. And even if the stock has another move to the downside, a buyout looks like a good possibility.
So for investors searching for an speculative turnaround play, Wendy’s is a good choice.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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