Does Yum! Brands Want to Take a Bite Out of Wendy’s?

With same-restaurant sales down, McDonald’s (NYSE:MCD) is having a hard time convincing customers to purchase its burgers. But Wendy’s (NASDAQ:WEN) is having no such problem — innovative new menus and redesigned locations have pushed up sales in six of the past seven quarters.

Thanks to the burger chain’s complete transformation, Barron’s contributor David Englander noted in a recent article that these positive changes make Wendy’s an ideal takeover target for Yum! Brands (NYSE:YUM), which does not have a burger restaurant in its portfolio of fast-food chains.

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Much attention was given to the marketing strategy of McDonald’s after the hamburger chain reported a surprising 2.2 percent decline in same-store sales in October. The company posted another decline in January, with sales down 1.9 percent, bringing its problems with competition to the forefront of investors’ minds. One of the chains bringing that competition is Wendy’s, where sales have increased 4.9 percent in the past two years. What McDonald’s lacks, the Ohio-based company has: popular new menu items, more focused marketing, and dramatically remodeled stores.

Because of these improvements, Wendy’s gained share in the hamburger and chicken sandwich markets…
Speaking at the California Dreamin’ Consumer Conference in New York last December, Chief Financial Officer Steve Hare described the company as being in the “early stages of a transformation of the brand.” Because the past 10 years have been challenging for the company, Wendy’s management is focused on differentiating itself from both fast-food competitors like McDonald’s and Burger King (NYSE:BKC) and edgier rivals like Panera (NASDAQ:PNRA) and Chipotle Mexican Grill (NYSE:CMG).

The main theme of Wendy’s transformation has been dubbed “A Cut Above” by company executives, who have worked to develop and price products that are of comparable quality to chains like Panera or Chipotle, but have a lower price point. The term “A Cut Above” can also be used to describe the company’s finances. As Barron’s reported, Wendy’s has a enterprise value, the combination of a company’s market value plus net debt, that is 8.4 times this year’s expected earnings before interest, taxes, depreciation, and amortization. That figure compares to EV/Ebitda ratios of 10 or more for other fast-food restaurants like McDonald’s or Yum! Brands.

According to the publication, the company’s revitalization will lead to a 40 percent increase in its stock price. Furthermore, analysts expect that earnings will increase to 18 cents per share, from last year’s 16 cents, and sales will rise 4 percent.

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