******OT*****\\These guys need to go online to get a market cap like AMZN:
Weekday Trader
Wall Street Is Warming Up To Wendy's
By Vito J. Racanelli
Dave Thomas, the founder of Wendy's International (WEN), is often portrayed
in the company's commercials as a regular, Joe Six-Pack kind of guy. And
his downhome, easygoing style has no doubt helped the fast-food chain
achieve some of the best sales gains in the business over the past couple
of years.
Wall Street, however, has been a much tougher sell. While the overall stock
market is up 15% this year, and restaurant shares are ahead a whopping 26%,
Wendy's stock lies prostrate, unchanged from a year ago.
The causes are clear. For some time now, investors have been unhappy with
the quality of Wendy's earnings. About 44% of last year's profits, or $81
million, came from the sale of real estate, mainly the land under the
restaurants and the outlets themselves, which are often bought by
franchisees. Management also has been sitting on a pile of cash, about $230
million. And the company hasn't expanded as fast as some would have liked.
This despite the fact that Wendy's restaurants are somewhat hard to find
on the West Coast and in the Northeast, especially compared to its two
biggest competitors McDonald's(MCD) Burger King, a unit of Diagio PLC (U.DEO).
Some investors simply walked away. Hutchens Investment Management in New
London, NH, for example, sold its small Wendy stake very early this year.
"We were losing patience with management," says William Hutchens, Jr.,
chief investment officer of the New London, NH-based institution.
Wendy's has also had some timing problems. The company announced a
restructuring in early February, just when the market unexpectedly fell in
love with McDonald's, pushing its shares from $47 to $60 during February
and March. No one seemed to pay attention as Wendy's tried to tell the
world that it planned to curtail real estate sales, close or sell
underperforming stores and step up expansion. Nor did anyone seem to care
that that Wendy's intended to use up to $200 million of its cash hoard to
begin its very first share buyback program.
In the past month or so, investors have preferred to focus on the fact that
first quarter earnings were merely in line with expectations and that
revenue dropped 1% to $455.6 million, reflecting the closing of nearly 60
poorly-performing company-operated restaurants. Net income totaled $23.8
million, or 18 cents per share, down 5% from $24.6 million, or 19 cents per
share, a year earlier. But this decline was misleading because in 1997's
first quarter there were $6.7 million, or 4 cents per share, in pretax
gains on asset sales. Wendy's was actually doing a bit better, but the net
income numbers didn't show it.
Wendy's moves might not be ignored for much longer. For one thing, in
recent weeks a number of big-name Wall Street brokerage houses have begun
to believe. After taking a closer look at the restructuring plan, at least
four have upgraded their ratings of the company's stock to "Buy" from "Hold."
The stock price has moved up a tad, but at Thursday's close of $23 1/2 per
share, it remains only 19% above its 52-week low. And some analysts and
investors say the stock could fetch $30 within a year or so.
Because of all the real-estate sales that figured into Wendy's past
earnings, the stock hasn't been given the kind of multiple it should get,
asserts Mitchell Speiser, an analyst at Lehman Brothers. While the decline
in real estate sales will hurt initially, the company is in effect
transforming one-time and less predictable gains on property sales into a
steadier annual revenue stream, from restaurant rentals and royalties, he
adds.
Mark Grolig, an analyst at Palley-Needelman Asset Management, says that
investor sentiment will improve and the multiple should expand
as Wendy's latest initiatives have their effect on the company's earnings
statements over the next few quarters. Palley-Needelman owns about 4
million Wendy shares or roughly 3% of the company's stock outstanding.
David Gardner, an analyst at Legg Mason Wood Walker, adds that he sees
Wendy's stock price moving from the current 17.5 times next year's earnings
estimate toward the company's historic average of 23.6x operating results
(that is, excluding the gains from selling the land under its restaurants
to the franchisees). Indeed, Wendy's P/E is now near the bottom of its
historical range of 80% to 140% of the multiple accorded the overall stock
market.
First Call shows consensus earnings expectations of $1.16 per share this
year and $1.34 next year. Profit growth for the next five years is put at
13% to 15% a year. (In 1997, Wendy's earned 97 cents per share.) By
comparison, McDonald's, admittedly the biggest and best known name in fast
food, is expected to increase earnings by only 11% or 12%, yet it commands
a price equal to 22.5 times next year's expected earnings.
Wendy's, meanwhile, continues to put up some of the best same-store sales
in the business. Sales in the first quarter were up 3.9%, and comparisons
were tough because last year same-store sales were up 9%. Wendy's average
for the last two years has been about 5.5%, considerably higher than the 2%
to 4% average seen at competitors, Lehman's Speiser points out. "And in
the second half of 1998, Wendy's will be lapping some easier comparisons,"
he adds.
And Wendy's first corporate buyback program isn't the only share purchasing
of note. Insiders seem to have changed their tune recently, as well. For
example, Wendy's Chief Financial Officer Frederick Reed bought 2,500 shares
at about $21 on February 24. That's the first insider purchase at Wendy's
after nearly three years of selling by company officials, according to
CDA/Investnet, a research firm that tracks such activity.
Tonight, Dave Thomas will pitch Wendy's newest entry, a honey ham and
chicken sandwich, during commercials of the last episode of "Seinfeld." If
Wall Street is watching, it's Wendy's shares that might become appetizing.
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