I am starting to see a turn-around in another fast food player that I have avoided, stayed away from, because, well, it’s been expensive on earnings. It didn’t have much momentum and frankly it wasn’t that well run. Now, all of these things are improving, this company is finally starting to live up to a variant of its old slogan. It’s getting better here. With the stock trading at $5 and change I think Wendy’s/Arby’s Group is finally worth owning because the turn is real…
The bottom line, the turn in Wendy’s is real even if I am in the minority judging by the lethargic stock price. I think the $5 fast food stock could go much higher thanks to the move in breakfast, international growth opportunities, plans for dual branding with Wendy’s/Arby’s and it’s getting better. The next big fast food stock.”– CNBC’s Mad Money 8/10/2009
On Monday’s Mad Money with Jim Cramer, the discussion turned to the fast food business. Cramer believes that Wendy’s Arby’s Group (NYSE:WEN) has finally taken a turn in the right direction and is doing the right things to run a stronger business. His thesis comes down to 4 key factors.
- Breakfast: Wendy’s is beginning to make a push into the breakfast business. As of right now, only 2% of orders are for breakfast items compared to an industry average of 22%. By rolling out new menu items, Wendy’s Arby’s is hoping to grab a bigger piece of this market.
- International Growth: McDonald’s (NYSE:MCD) is the fast food industry standard for a lot of reasons, one in particular is their extremely strong presence internationally. Wendy’s is looking to delve into Saudi Arabia and Singapore among others areas in order to find emerging market growth opportunities. This will help them diversify geographically, and move away from a largely saturated U.S. market.
- Co-branded Stores: Wendy’s Arby’s Group will take a cue from Yum! Brands (NYSE:YUM), which began dual branding Taco Bell and KFC stores. Obviously, this strategy will help to contain overhead and should improve margins compared to stand alone stores. The company will utilize this design in some new stores, particularly internationally and will be essentially two locations for the price of one.
- Price: Cramer likes that fact that this stocks is trading in the low $5 range and has yet to break out into a substantial move.
From our view, Wendy’s Arby’s has become a more attractive stock recently, but we are sticking with our Fairly Valued rating. We are in agreement with Cramer on his first three points because these are all solid strategies to drive growth. However, we have to admit that the price of Wendy’s is not appealing to us for the time being. Comparisons to the past are difficult because of the relatively recent acquisition of Arby’s. So, when looking at comparisons to some of its closest competitors McDonald’s and Burger King (NYSE:BKC), Wendy’s stock over the last year has held up much better than BKC and a bit better than McDonald’s. More recently, Wendy’s has greatly outperformed the others on a one month and three month basis as well. The catalyst for this move, as far as we can see, has not been WEN’s improved fundamentals.
Wendy’s still trades at a significant premium to earnings, and has been a much hotter stock than its competitors recently. We are in agreement with Cramer that the company is starting to turn a corner, but we cannot recommend buying these shares at the current price. The stock is getting the “Cramer bounce” of 5.5% today that often comes the day after Cramer covers a stock on his show. If the stock did have a pull back of 10%-15% and continues to show improved profitability and growth, then we would likely become at least interested.