Investors are drooling over the outlook for fast-food restaurant Wendy’s Co., sending its shares up by as much as 10 per cent on Monday.
The world’s third-largest hamburger chain, in the midst of a brand overhaul, beat analyst expectations with its 2014 earnings forecast.
The Dublin, Ohio-based company also announced a $275-million (U.S.) share buyback, while continuing to cuts costs by franchising more restaurants. “We do feel like we are building a stronger Wendy’s,” chief financial officer Todd Penegor told investors during a presentation on Monday.
While investors are excited, many analysts remain cautious given the intense competition and rising food costs that are eating away at profits across the industry.
“Regarding Wendy’s, the challenge will be to remain ahead of the innovation curve in spite of a lacklustre industry environment,” RBC Dominion Securities analyst David Palmer said in a recent note.
He is one of 11 analysts that have a “hold” recommendation on Wendy’s, while five see it as a “buy” and two “sell,” according to S&P Capital IQ.
“Wendy’s has proven its ability to outperform the industry in the short term. However, we have limited conviction that it can sustain its momentum over the longer term,” Mr. Palmer said.
Still, he has Wendy’s on his “watch list” for potential outperformance this year, citing its changing business model and new image.
Wendy’s makeover includes a young red-headed pitchwoman in its advertising, redesigned restaurants and the sale of more locations to its franchisees, which helps to reduce overall operating costs.
The company plans to sell 415 stores by midyear. So far it has sold or has agreements in place to sell 384. Wendy’s has a total of 6,558 restaurants, most of which are in North America. About 80 per cent of its restaurants are currently owned by franchisees.
The results of the revamp appear to be lifting Wendy’s stock, which has jumped 87 per cent over the past year, outpacing the performance of rivals such as McDonald’s Corp., Burger King Worldwide Inc. and Yum Brands Inc., the company behind Taco Bell and Pizza Hut.
It credits the promotion of new menu items, such as the Pretzel Bacon Cheeseburger and Bacon Portabella Melt on Brioche, for lifting same-store sales among company-owned restaurants by 3.1 per cent in the fourth quarter, compared with a decrease of 0.2 per cent last year. Franchise same-restaurant sales increased 2.8 per cent versus a 0.6 per cent drop last year.
Wendy’s forecasts fourth-quarter net income of $25.2-million (U.S.) to $28.7-million, or 6 to 7 cents per share, compared with $26.4-million or 7 cents per share in the same period a year earlier. It expects total sales to fall 6 per cent to $592.4-million, which it blames on costs related to its restructuring. It plans to release fourth-quarter and full-year results later next month.
For 2014, it expects earnings to be between 34 and 36 cents per share, which is above the average analyst forecast of 29 cents, according to Thomson Reuters I/B/E/S.
That helped Wendy’s shares close up 6.4 per cent, or 54 cents, to $8.98 on the Nasdaq on Monday, slightly below its 52-week high of $9.51 in November.
Wendy’s attempt to reposition its brand as higher quality compared with its fast-food competitors is helping to boost its shares, said Wedbush Securities analyst Nick Setyan. “And they continue to do a number of shareholder-friendly activities,” he said, citing the share buyback announced Monday as an example.
Wendy’s also pays a dividend yielding 2.4 per cent, which is higher than Burger King’s at 1.2 per cent, in line with Yum Brands at 2 per cent, but lower than McDonald’s at 3.4 per cent.
Wendy’s is in the middle of the pack among its peers when it comes to EBITDA, or earnings before interest, taxes, depreciation and amortization. Wendy’s trades at 11 times, compared with about 10 times for McDonald’s and 14 times for Burger King, according to S&P Capital IQ.
Bruce Campbell, president of Campbell Lee & Ross Investment Management, said his firm doesn’t own Wendy’s because the name doesn’t stand out much from its peers.
His funds own McDonald’s because it’s the leader in the sector and pays a fat dividend. “Wendy’s would be a riskier way to play the same trend,” he said.