Wendy’s Stock: 3 Pros, 3 Cons

by Tom Taulli | April 4, 2012 2:10 pm

Restaurant Fast Food Wendys 300x199 Wendy’s Stock: 3 Pros, 3 Cons[1]Wendy’s (NASDAQ:WEN[2]) overtook Burger King[3] 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[4]), 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:

Pros

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[5] 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[6], 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.

Cons

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[7]), not to mention other fast-food chains like Yum Brands‘ (NYSE:YUM[8]) 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.

Verdict

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[9], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[10]“All About Short Selling”[11] and “All About Commodities.”[12] Follow him on Twitter at @ttaulli[13] or reach him via email[14]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/05/Restaurant-Fast-Food-Wendys.jpg
  2. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  3. overtook Burger King: http://investorplace.com/2012/03/the-fast-food-chain-thats-ripe-for-a-buyout-mcd-wen-sbux/
  4. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  5. going-private transaction: http://investorplace.com/2012/03/the-fast-food-chain-thats-ripe-for-a-buyout-mcd-wen-sbux/
  6. to go public yet again: http://investorplace.com/ipo-playbook/burger-king-plans-to-go-public-again/
  7. JACK: http://studio-5.financialcontent.com/investplace/quote?Symbol=JACK
  8. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  9. IPO Playbook: http://investorplace.com/ipo-playbook/
  10. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  11. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  12. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  13. @ttaulli: https://twitter.com/ttaulli
  14. email: mailto:tom@taulli.com

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