Is The Wendy's Run Over Or Just Beginning?

| About: The Wendy's (WEN)
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Over the last year, Wendy's (NYSE:WEN) stock has been on an impeccable run. I last wrote about Wendy's almost a year ago, and at the time it was trading at just over $5 per share. As of 1/21/14 Wendy's was trading at just over $9 per share. That amounts to a $4 per share or 75% increase in just under a year. What caused this tremendous run up in Wendy's share price? They have been doing just about everything right. In a time where McDonald's (NYSE:MCD) and YUM Brands (NYSE:YUM) are struggling to keep up sales, Wendy's has been growing sales at uncanny rates.

Wendy's is confident in itself and with good reason. Wendy's proved just how confident they really are when they announced a "Dutch Auction" tender offer to repurchase up to $275 of its common stock between the price point of $8.50 and $9.25 per share. On 1/13/14, Wendy's released preliminary earnings and Wendy's projects 2013 4th quarter earnings to come in at $.10 to $.11 compared to consensus analyst expectations of $.06. Wendy's also raised its 2014 outlook and expects to see company operated stores up 140-160 bps. Additionally, they adjusted their 2014 forecasted earnings and now see profits of $.34 to $.36 per share compared to consensus analysts' expectations of $.29. This bump in earnings forecast came along side with a projected same store sales increase of 2.5 to 3.5%, all the while other competitors like MCD and Yum continuing to struggle with this key metric. Clearly, Wendy's is bullish on its 2014 outlook, so why shouldn't we be?

What's going on over there at Wendy's? What exactly is working for them? It's no secret how big of a hit the pretzel bun burger was and still is. Adding to the impressive burger was the chicken pub sandwich and now there is the asiago chicken sandwich. Needless to say, all of these burgers and sandwiches that have been released over the last couple years have been huge hits with the consumers. These sandwiches are on the higher end of fast food prices and range from $5 to $7 for a sandwich, not including the meal. This is where Wendy's strength is really starting to shine through. In addition to Wendy's strong array of high quality sandwiches is the "Right Prize, Right Size" menu. This is all part of its "high price, low price" initiative. These varying menu offering makes Wendy's real industry leaders and pioneers to the idea. The "Right Prize, Right Size" menu has had a tremendous response from the consumers and accounts for upwards of 15% of total sales. It is because of this that Wendy's continues to be innovators in the fast food industry and this in large part is the reason for the 75% return on investment to shareholders in 2013.

Wendy's has truly turned its company around and seems to be firing on all cylinders. Keep in mind that Wendy's has rallied over 100% since the lows it reached in 2012. As Wendy's continues its reimaging process, they should continue to gain market cap in the overcrowded restaurant industry which accounts for over $500 billion in global sales yearly. Additionally, Wendy's is preparing to double the amount of store revamps in 2014 as compared to 2013. The revamped and reimaged stores showed great success and proved they are worth the infused capital. The new designed stores are a big hit and traffic at revamped locations have picked up tremendously. The growth has really all come under the revamping and new image and new logo. As management pours more capital into the future growth prospects, the possibility of continued growth is far easier to see becoming a reality.

McDonald's in the last year has seen its stock increase below the major market indexes at only 2.1%. Yes, 2.1% isn't half bad but when you compare it to Wendy's 75% return it seems awful. As we've discussed Wendy's has healthy figures and as if the case for Wendy's wasn't strong enough, they provide their shareholders a moderate dividend which yields over 2%. Wendy's has approximately $1.31 in cash per share with a $3.5 billion market cap, whereas, McDonald's has only $2.56 with a $95 billion market cap. This becomes mindboggling when you see the trading price of McDonald's is over 10x the trading price of Wendy's. YUM provides it shareholders with the same 2.1% dividend yield as Wendy's but trades around $71 per share and only carries $1.69 in cash per share, all the while possessing a $32 billion market cap. On Jan 23rd, McDonald's will report its fourth-quarter earnings. The last released figures indicate that McDonald's growth seems to have been slipping and sliding. Last quarter, U.S. same-store sales gained a small 0.7%. YUM Brands reports earnings on February 3rd and has struggled itself as they have been linked to HGH issues involving the chicken from two of its main China producers. YUM is betting on the success of China and has a huge investment stake, as 70% of its restaurants are located in China.

Besides for the concerns over the past strength of McDonald's and YUM Brands, is their real potential to turn around some segments of their businesses that they are struggling in, that Wendy's is currently benefiting from. Additionally, investors should certainly keep an eye on the growing national debate over minimum wage and wages for fast food workers. If congress decides to approve a hike in wages for fast food workers, it would absolutely affect the future earnings, margins, and profits for Wendy's and competitors alike.

With Wendy's providing such a bullish outlook, announcing plans to buy back $275 million more of the common stock, and providing new and improved earnings outlook guidance the promise of potential seems real. Additionally, as the company continues to revamp more of its restaurant locations it's already growing same store sales should increase even further. Not to mention, all the while offering a modest dividend yield of 2.1%. Rather than buying a few fast food meals, take a look at buying some Wendy's stock, you may be able to afford more than a few fast food meals down the line.

Disclosure: I am long WEN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.