Does Wendy's Move Towards Fast Casual Make It A Strong Buy?

| About: The Wendy's (WEN)

The Wendy's Company (NYSE:WEN), when compared to McDonald's (NYSE:MCD), has surprisingly weak financials. Wendy's 2011 revenue is expected to be $2.43 billion compared to $27 billion for McDonald's. Wendy's $1.95 billion market cap looks miniscule to McDonald's $103.25 market cap. When looking at Wendy's poor performance and earnings hovering around zero and Burger King being passed around by private equity firms, the Golden Arches are the obvious rulers of the low end burger joints. However, "Dave's Hot 'N Juicy Burgers" and the company's intentions to make the move to fast casual make WEN a good speculative buy for future.

Fast casual restaurants are a hot trend nowadays. By creating a better store environment and selling higher quality food while still using the fast food service model, many companies like Starbucks (NASDAQ:SBUX), Chipotle Mexican Grill (NYSE:CMG), and Panera Bread (NASDAQ:PNRA) have been able to strongly outperform "classic" fast food chains and have formed a new market for themselves. The three aforementioned companies have market caps of $36.47 billion, $11.69 billion, and $4.74, respectively, which are incredibly high compared to the market caps of Sonic, Jack in the Box (who also owns Qdoba), and Nathan's, which all have market caps of $1 billion or less. Wendy's strategy shift to fast casual will move it from being second place in a weak industry to being in the middle of a booming one. The true challenge is the execution of the plan and Wendy's has the ability to make the transformation.

Wendy's is expected to boost its earnings per share to 18 cents in 2012 and 24 cents in 2013, which is great considering that the company's EPS has hovered around 14 cents for the last three years and the company has negative retained earnings. Currently trading at $5.00 per share, Wendy's will easily justify its value if it can achieve $3 billion in revenue with a fast casual business model. If the fast casual tranfromation is successful, WEN will be a $10 stock in 3 years. If not, expect Wendy's shares to hover around $5. There is a lot of upside potential and almost no downside.

It's important for investors to make speculative bets on companies' strategy changes in order to achieve high returns and have a well-diversified portfolio. Wendy's is the best speculative stock pick in fast food right now due to their potentially successful shift to fast casual. However, for those looking for a fast food stock to hold long term in a retirement portfolio, I still recommend McDonald's. The management has done an excellent job over the last 2 years and the company has been elevated to new levels of success. Their brand and economies of scale will keep its earnings up for years to come. The fast food industry as a whole is a great market hedge since the stocks are generally "recession-proof" and both WEN and MCD are strong buys right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.