Should Investors Believe in Wendy’s?

With shares of The Wendy’s Company (NYSE:WEN) trading at around $5.20, is WEN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

wendys“Where’s the beef?” was Wendy’s most memorable moment, but what Wendy’s really misses is Founder Dave Thomas. He was the heart and soul of the operation. Since his death in 2002, Wendy’s has seemed lost. Finally, the fast-food company has decided to embark on a daring restructuring operation. This includes changes to the menu, marketing, restaurant décor, and more. Wendy’s has always played third fiddle to McDonald’s Corp (NYSE:MCD) and Burger King Worldwide (NYSE:BKW), but that used to work. Now, with the industry not as strong as in the past, Wendy’s needs to make a move — or at least make some noise.

Wendy’s is going for higher quality in every area, and a new logo will be revealed in March. This might all be exciting, but let’s remember that the Arby’s merger and breakfast plan failed. However, this time around, CEO Emil Brolick is in full control. With a stellar track record at Yum! Brands (NYSE:YUM), specifically Taco Bell, his game plan seems to have more momentum and potential. Same-store sales have increased 4.9 percent over the past two years, so there is so momentum to build upon.

Let’s take a look at some important numbers prior to forming an opinion on the stock.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Wendy’s is normal. The balance sheet is in negative territory, but manageable.

Debt-To-Equity

Cash

Long-Term Debt

WEN

0.74

$453.59 Million

$1.46 Billion

BKW

2.74

$488.10 Million

$3.07 Billion

MCD

0.96

$2.19 Billion

$13.26 Billion

 

T = Technicals on the Stock Chart Are Solid  

Wendy’s has actually underperformed the S&P 500 over the past three years, but the dividend yield adds to the stock’s value. Currently, Wendy’s yields 3.20 percent, which is the same as McDonald’s. Burger King yields 1 percent.

1 Month

Year-To-Date

1 Year

3 Year

WEN

7.78%

10.53%

1.87%

13.80%

BKW

-7.05%

0.97%

0.55%

N/A

MCD

3.83%

7.97%

-1.18%

63.93%

 

At $5.20, Wendy’s is currently trading above all its averages.

50-Day SMA

4.87

100-Day SMA

4.62

200-Day SMA

4.59

 

E = Earnings Have Been Steady        

Earnings have been steady, but that’s not necessarily meant in a good way. Earnings have been so steady over the past four years that they have gone absolutely nowhere. The only positive is an improvement from 2008, but that hasn’t been a difficult feat for most companies. Revenue has been consistently improving over the past two years, but not in a significant manner.

2008

2009

2010

2011

2012

Revenue ($)in billions

1.82

2.44

2.38

2.43

2.51

Diluted EPS ($)

-2.58

0.01

-0.01

0.02

0.01

 

When we look at the last quarter on a year-over-year basis, we see a slight improvement in revenue.  

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in millions

615.02

593.19

645.87

636.31

629.88

Diluted EPS ($)

N/A

0.03

-0.01

-0.07

0.06

 

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

There has been a lot of talk about burgers not being as popular as in the past. Yes, there are more health-conscious individuals than there were 10 or 20 years ago, but there are also more individuals. The point here is that there are more people to enjoy the kind of food Wendy’s has to offer than there were 10 or 20 years ago. Signature beef burger sales across the industry dropped 28 percent between 2006 and 2011, but there was a 3.7 percent rise in traffic during that same time period. So, what’s the catch? Beef costs have increased, which led to more chicken items on menus. Have you noticed an array of chicken ads over the past few years? That’s because chicken is a cheaper cost.

There is a double-edged sword throughout the industry right now, and it has everything to do with inflation and deflation. If food costs continue to rise, then costs for customers simply continue to rise. If the current economic environment proves to be a bubble, then everything deflates and the consumer slows at a considerable rate. Wendy’s would prefer the former scenario. The company has already stated that it can handle the increased costs related to food inflation. That’s great, and all Wendy’s investors can gather in a circle and sing Kumbaya, but when will that be seen on the bottom line?

Conclusion

Wendy’s has a good game plan and quality leadership, but the environment is too challenging for an OUTPERFORM recommendation. The Trailing P/E is currently a whopping 650. The Forward P/E is 26, but that’s still not overly comforting.

Taking all factors into account, Wendy’s is currently a WAIT AND SEE.  

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.