Taking Another Tour With The Wendy’s Company (WEN)

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If you are an investor hungry for gains, The Wendy’s Company (NASDAQ:WEN) may be able to fill your appetite. This is because, since my last positive article about this giant in January of this year, the company’s stock has outperformed that of major competitors such as McDonald’s Corporation (NYSE:MCD), Yum! Brands, Inc. (NYSE:YUM), Burger King Worldwide Inc (NYSE:BKW), and Chipotle Mexican Grill, Inc. (NYSE:CMG).

To continue this great performance, Wendy’s is undertaking a number of initiatives. But at the same time, there lie a number of uncertainties and headwinds, which could become a negative issue for the company’s shares in 2013.

Fundamentals and valuations

A table is being provided below that will compare Wendy’s major valuation measures and fundamental metrics to that of its competitors, and the S&P 500 Index.

Source: Thomson Reuters, Capital IQ, SEC filings.

It can be observed from the above table that The Wendy’s Company (NASDAQ:WEN) still has one of the most attractive valuations. A negative factor is that the company has the lowest EBITDA margin, but this is already factored in its lowest EV/EBITDA ratio of 9.1. On a price-to-book value and price-to-sales basis, Wendy’s trades below its peers and the S&P 500 Index. Importantly, based on price-to-CFO, Wendy’s is also undervalued, underscoring the company’s cash generating capability.

Company initiatives

In this competitive fast food industry, all the players are forced to constantly reinvent themselves, and offer new menu items to hold their valued customers. The largest effort that The Wendy’s Company (NASDAQ:WEN) undertook in the past year is its image activation campaign, that include inside remodeling (tier 1, 2 and 3) as well as structural and outside improvements (tier 1). The company renovated 48 franchise stores in 2012 under the program, and plans to renovate an additional 100 (although more than 100 applications were received) in 2013, with 20% of system wide locations renovated by the end of 2015.

As per estimation, tier 1, the most expensive renovation improves sales by as much as 25%. Tier 2 and 3 image activations will be tested this month. So, there lies an uncertainty about its success comparable to that of tier 1. Upon completion of each image activation, the company pays an incentive. So in this quarter of 2013, estimated expenses for renovation will be $10 million.

This second largest burger chain is constantly introducing new upscale menu items (Dave’s Hot ‘N Juicy, Baconator, Asiago Ranch Chicken Club, and others) followed by a recently launched value offering called “right price right size menu”. The company also introduced a new logo, packaged with inspiring graphics, more stylish uniforms, and bolder ads. All this, combined with an increased advertising budget and focus on social media, should contribute to the company’s 2013 projected EBITDA in the range of $350-$360 million, compared to EBITDA of $333 million in 2012.

Wendy’s major competitors are also undertaking similar initiatives, which are being provided in the table below.

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