Investors have been wild about fast-food stocks, but Wendy's (NYSE: WEN) shares got ripped from the menu Monday.
But why, you might ask. Everything's coming up burgers, regardless of health nuts. People stayed crazy for Atkins, instead of getting paranoid about mad cow. Despite all the good news, however, Wendy's still lowered its 2004 outlook. Even a doubled dividend wasn't enough to assuage cranky investors. (And a doubled dividend is music to the ears of the types of folks who subscribe to The Motley Fool's Income Investor newsletter.)
Just last Friday, Wendy's reported just the kind of quarterly numbers investors wanted to see, and W.D. Crotty explored the rather unsurprising surprise. So what's the drag? Wendy's expects its results to be affected by high beef costs in the first quarter, and the performance of its Baja Fresh chain has not been not so fresh. The hamburger chain also said Monday it would raise its stake in Café Express, its Texas-based bistro chain, to 70% from 45%.
When the mad cow disease story broke, some analysts theorized that bans of U.S. beef by other countries would result in lower beef prices. That, in turn, would have been a boon to fast-food companies such as Wendy's, given the consumer appetite for burgers. Right now, though, Wendy's outlook counts in high prices for beef, which it sees increasing by 14% to 17% over 2003 prices.
Meanwhile, lines are short at Baja Fresh, caused perhaps by Chipotle, McDonald's (NYSE: MCD) answer to the Mexican grill idea. Wendy's said it will slow Baja Fresh's growth while increasing its stake in Café Express. Whether the healthy sandwich concept can offset the disappointment that Baja Fresh has been serving up with salsa remains to be seen. Wendy's slowed its long-term earnings target to 11%-13%, compared to 12%-15%.
Digesting the news seemed to give investors sour stomachs, as the stock closed Monday's session down nearly 4%. However, judging by restaurant goers' continued appetite for fast food and Wendy's recent months of fired-up same-store sales, it seems the negativity may be overdone. January data should also show whether the consumer is having any second thoughts about being cavalier about mad cow.
Are you willing to forgive Wendy's for the sake of long-term growth? Or does the downward revision leave a bad taste in your mouth? Talk it over with other Fools on the Wendy's discussion board.
Alyce Lomax welcomes your feedback via email.
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