Wendy's Is a Tasty Buy - Barron's

Despite some market skepticism about a recent bond offering, Barron's says Wendy's Arby's Group looks appetizing.

Wendy's Arby's (WEN) is down more than 30% since late April, as investors worry about declining sales at Arby's and how the company plans to use the money from its recent $565M bond offering.

Investor Nelson Peltz, who with his partner Peter May owns 22% of the shares, says the company is 'significantly undervalued.' Peltz points to expected cash flow, which should reach $420M this year and could reach around $555M in 2011. Putting a multiple of nine on 2011 Ebitda, the stock could be worth $8.50 vs. a recent $3.63. Even with a multiple of seven, the stock would be worth $6.

Last year, Wendy's Arby's posted a loss of $3.05 per share, mostly reflecting the costs of the Wendy's-Arby's merger. The smaller of the two, Arby's contributed about a third of the combined firm's $3.7B in 2008 sales and around 35% of its operating income. Wendy's Arby's plans to improve results with $60M in cost efficiencies and $100M from raising margins at company-owned stores.

Of the money raised in its $565M bond offering, $132.5M will be used to repay some bank debt. The remaining funds will be used for general corporate purposes, covering anything from working capital to acquisitions to dividends and buybacks. Some analysts said the company didn't need the money, as it had $137M of cash and $116M in investments at the end of Q1. But Peltz stresses the importance of financial flexibility, commenting that "our philosophy is that when money is available, you take it, and take the risk out of your balance sheet."

The bond money could be used to finance growth. Management says Arby's could go to 5,000 stores from 3,500 and Wendy's could go to 7,000 stores from 6,000 without cannibalizing sales. Since a new store could provide a 20% return on invested capital, it would justify the bond's 10.5% yield.

The company is also developing a new breakfast menu, which has the potential to be a major growth area, and plans to open some combined Wendy's/Arby's stores.

Some investors worry Peltz and May are using the stock as a cash cow, and there were recent rumors that Peltz and May would direct the company to use some of the bond proceeds for a special dividend or stock buyback. For his part, Peltz calls a special dividend foolish but won't rule out a stock buyback, especially considering his view that the stock is cheap.

Regardless of the intentions of Peltz and May, the stock does look cheap, especially when one backs out the property value of the company's 700 stores without encumbrances - leaving the stock valued at just $2.70.

• Value investor Robert Gebhart, a partner at money-manager Grisanti Brown & Partners, which owns shares, says favorable circumstances could see shares at $9 in three years.

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• Wendy's Arby's: Q1 EPS of -$0.02 misses by $0.05. Revenue of $864M (+185.2%) vs. $890M. (PR)
• Earlier this month, Wendy's Arby's reached an agreement to build 135 dual-branded stores in nine countries in the Middle East and North Africa over the next ten years.

Comments

[jay fredric...:]

Thanks for the update on my flavorite restaurant stock. We have been buying aggressively in the last 2 weeks.

Jun 28 09:11 AM