Wendy's: The Best Value Menu for Your Portfolio

While companies like McDonald’s (MCD) have recently had their moment in the spotlight, other fast food companies with strong fundamentals, higher growth, and better all around value have gone unnoticed until recently. McDonald’s two biggest competitors, Wendy’s/Arby’s Group (WEN) and Burger King (BKC), sport slightly higher growth and much higher value when compared to their biggest competitor, McDonald’s.

Analysts on average expect McDonald’s to earn $3.84 a share in 2009, up slightly over the past 3 months from $3.81, giving it a forward price over earnings ratio of 15.53. McDonald’s has also been hovering near its 52 week high and has just recently fallen under $60 a share. Another reason to believe that McDonald’s time in the spotlight might be coming to an end is the seven insider sales over the past six months and the one buy. McDonald’s has an estimated growth rate of 9.33% a year for the next five years.

Burger King beats McDonald’s on growth with a 14.93% growth rate per year for the next five and value with an estimate of $1.77 a share for the year 2009, leaving it with a forward price to earnings ratio of 12.62. As far as insider sales go, McDonald’s and Burger King are neck and neck, each having seven sales. Though Burger King slightly lags McDonald’s with no buys to McDonald’s one.

The real winner of the race is definitely Wendy’s/Arby’s Group, whose shares shot up nearly 7% on Friday to close at $5.50 a share, after being up almost 100% from its low in late October of $2.63 a share. After a gain like that, it’s hard not to think Wendy’s/Arby’s Group might have already had their time in the spotlight as well. After being bought out by Arby’s for $2.3 billion in April of last year, Wendy’s has recently undergone a complete revamping of its restaurant as well as its menu. It now seems to have a value menu that is highly competitive with its much larger competitor, McDonald’s.

Value menu aside, estimates for 2009 have remained steady at $1.12 a share leaving Wendy’s/Arby’s Group with an astoundingly low price to earnings ratio of just 4.91, and a 5 year growth rate of 14.33%, just a hair below the leader, Burger King. If doubts still remain about Wendy’s/Arby’s Group, one would only have to look at the seven insider purchases in the past 6 months and the zero sales to confirm that in fast food, Wendy’s/Arby’s Group bring you the most bang for your buck as well as the best prospect for growth in the coming years.

Disclosure: Long WEN.

Comments

[User 283977:]

I think its important to think about risk in times like these. Which investment is more risky, McDonalds or Wendy's?

McDonalds performance was somewhat decoupled from general market performance during the recent crash, so its stock valuation is somewhat safe. We don't know if Wendy's performance is decoupled because Wendy's stock price has been dropping consistently over the past two years.

The analyst says that the earnings growth rate of McDonalds is 9.33% per year while Wendy's is 14.3%. That looks good. However, I would argue that the McDonalds growth rate figure is more reliable then the Wendy's number because Wendy's number is based on the performance of a new menu in conjunction with a recent merger. Does that Wendy's growth rate have legs?

In order for any company to grow, they need capital. I note that Wendy's provides a dividend of about 1 cent per share. Yet even at that low level, its dividend payout ratio is 88%. Dividend payout ratios above 50% for standard equities are suggestive of capitalization issues. This raises questions about the sustainability of that reported Wendy's growth rate figure. The data seems to suggest that Wendy's should drop the minimal dividend and save their capital for growth. At this point in time, Wendy's is not a dividend investors stock, it’s a potential growth stock. If you are going for growth, why not maximize your operations for growth? So if Wendy's management thinks they are going to be substantially growing, why are they still paying that dividend?

Given that big pop on Friday, I think I would wait to see if the stock rebounds as investors take profits. Looking at Wendy's chart, it looks like there is a historical support level at about 5.5, and another at about 6.5. However, those support levels are based on the performance of its historical menu, not its new menu. As a consequence, if Wendy's price broke out of that older support level at $6.5, I would be more inclined to believe the near-term sustainability of that 14.3% growth rate.

My perception is that the general markets are going to be going sideways for most of 2009, punctuated with some periods of substantial ups and downs. I think the current economic environment favours large cap dividend earning stocks as opposed to growth stocks. I suspect few companies are going to be growing in 2009.

Disclosure: I own a small position in McDonalds and intend to sell at $65.

Jan 19 12:58 PM

[User 283977:]

Here we are on June 11, 2009. WEN is at 3.74 and fading. It appears to be heading for its lower level support level of $3.50. I guess the revamped restaurants and menus are not working as anticipated. I have seen some advertising for WEN, but I doubt its enough to generate NEW traffic. Add on to this WEN advocate Bill Ackman appears to be selling out of his position, and things are not looking good. Time for some realistic research designed to find out where they stand, and why they are not growing. Something is clearly wrong.

Jun 11 11:49 AM

[sesails:]

Wendy's has lost my business and that of my family forever. I went in and ordered from the $1 menu and was screwed. The first thing they asked me was whether it was to eat in or to go. I told them to go and ordered from the $1 menu. A dbl. cheeseburger, fries and a cup of chili. Got home a my dbl cheesburger was a jr. hamburger. My "value fries" cost $1.39 and the chili cost the same. The old 'bait and switch' here in Toccoa, GA. I guess that's about all I can stand. I took a chance on them but no more. I'm heading back to "Sonic" for great burgers, tator tots and great customer service.

Aug 30 04:26 PM