Over the last year, Wendy’s (WEN) has been the fast-food chain of choice for investors and consumers alike. Shares of the company have surged over 86% over the last 12 months, thanks in part to the popularity of the chain’s Pretzel Bacon Cheeseburger — the most successful fast-food menu item launch in years.
Meanwhile, Burger King (BKW), which lost its second-place standing in the fast-food market to Wendy’s recently, has posted a 35% gain. And industry leader McDonald’s, whose struggles are well-known, is up only 5%.
The Wendy’s turnaround has been remarkable. Billionaire Nelson Peltz’s holding company Triarc acquired the chain for $2.4 billion in 2008 and merged it with Arby’s, which he also owned.
The marriage was rocky from the start, though. Arby’s expensive roast beef sandwiches were precisely what customers didn’t want during the country’s worst economic slowdown since the Great Depression, and Arby’s was slow to offer a value menu.
The rocky marriage didn’t last long, though. Wendy’s clearly boasted the stronger brand and far better potential for growth overseas, so Arby’s was sold to a private equity group in 2011. Things have been looking up ever since the management began focusing on the company Dave Thomas named after his daughter.
See, right after Wendy’s was acquired by Triarc, the company spent nearly two years interviewing 10,000 customers to find out what they liked. It adjusted its menu accordingly, emphasizing fresh over processed foods and adding more salads and sea salt french fries.
This new attention to detail was highlighted in the company’s marketing as well. Wendy’s always focused on the fact that food was tasty — avoiding the mistake McDonald’s has made by overemphasizing price to an extent that many consumers consider it cheap and thus low-quality.
Wendy’s isn’t ignoring value customers, of course, but has managed to strike the right balance. It offers inexpensive fair that attracts value consumers, along with higher-end items that appeal to consumers with more cash.
Plus, Wendy’s has wisely been unloading restaurants to transfer more of the risk to franchisees as McDonald’s and Burger King have done for years. And it’s in the midst of remodeling its stores to give them less of a “greasy” look.
As I mentioned earlier, this has paid off; for the full-year of 2011, Wendy’s beat out Burger King as the No. 2 burger chain in terms of sales — a spot that the Home of the Whopper had held for decades — and has held onto that silver medal since.
Of course, the recent success of Wendy’s leads us to one major concern for the stock: It trades at a forward P/E of more than 31 — a premium to the forward P/E of 16 for McDonald’s and 22 for Burger King. It’s especially concerning when you consider that WEN and BKW are both on tap for 16% growth over the next five-years, yet WEN’s multiple is around 40% higher.
Still, though the shares are expensive, the potential rewards of owning Wendy’s outweigh the risks. I believe Wall Street is underestimating the company’s growth potential, considering Wendy’s is well-positioned to capitalize on consumers’ growing demand for healthier food. In fact, McDonald’s recent overhaul of its menu to add more healthier fare seems to be a reaction to the growing strength of Wendy’s.
The bottom line is that lightening struck Wendy’s with the Pretzel Bacon Cheeseburger, and I wouldn’t be surprised if it happened again. Plus, Wendy’s pays a dividend that yields 2.4%, which makes the shares even more attractive.
The trick, though, is timing. Investors should wait for a pullback of about 5% or so before pulling the trigger.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.