George Putnam has been providing his subscribers with intelligence on investable turnaround situations in The Turnaround Letter for over 20 years. His latest recommendation will be familiar to all of you as a company, but to few as an investment. That’s because the stock has been a complete non-performer for over five years. That’s about to change though, according to Putnam:
“The Wendy’s Company (WEN) began in 1969 as a single restaurant in Columbus, Ohio named after founder Dave Thomas’ daughter. Now it has more than 6,500 restaurants in the U.S. and 27 in other countries. After carving out a niche in the fast-food industry based on good quality food and service, Wendy’s has faltered in recent years, suffering from a stale menu and image. The company was acquired by financier Nelson Peltz in 2008, who combined Wendy’s with the Arby’s chain, which he already owned.
Analysis
“Wendy’s has a number of the characteristics that we like to see in a turnaround situation: a well-known brand, renewed focus, a new management team with turnaround experience, decent financials and a large shareholder with a lot at stake.
“Wendy’s sold off the Arby’s franchise last year so that it can focus solely on the Wendy’s brand. Last September the company brought in Emil Brolick as its new CEO. Brolick has a long and successful career in the restaurant business, including a previous stint at Wendy’s where he helped engineer an earlier turnaround beginning in the late 1980s. He then moved to Yum Brands where he was credited with turning around the Taco Bell franchise.
“Brolick is committed to restoring Wendy’s quality image, with particular emphasis on bringing back adult customers who have been lost in recent years. He also plans to enter the lucrative breakfast segment, which Wendy’s has missed out on until now. Another area of expected growth is the opening of new restaurants, especially abroad.
“Although there is debt on the balance sheet, the financials look solid enough to support Brolicks turnaround strategy. Cash flow should be sufficient to service the debt and sustain the modest dividend. Peltz owns almost 100 million shares, which gives him a big incentive to get things back on track.
“While Wendy’s will probably always trail industry leader McDonald’s, a comparison of the two companies shows the gain potential in the Wendy’s stock. McDonalds (MCD) currently trades at a price-to-sales ratio of nearly four, while Wendy’s is around one. If business improvements caused investors to give Wendy’s a multiple even a little closer to McDonalds, the stock would move up significantly. Throw in an additional boost from continued improvement in the U.S. economy, and you have a recipe for tasty profits indeed. We recommend buying Wendy’s stock up to 8.”
- George Putnam, The Turnaround Letter, March 2012