Investors Put Faith in Wendy's

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If you were interested in a high-flying company, you might not be interested in one that was posting 0.4% comparable sales growth. That's pretty low when you consider that companies such as Starbucks can put up 8% comparable sales growth.

Welcome to the world of Wendy's (NASDAQ: WEN  ) . The burger chain announced preliminary second-quarter results earlier this week, and investors ate them up. The stock has risen 30% in 2013, handily beating out the S&P 500. The company is sitting on about three times as much long-term debt as it has cash, and sales are sluggish. So what gives?

A little goes a long way
When Wendy's beat expectations, it did so by earning $0.08 per share when the market was expecting $0.06. The company managed to generate a lot of excitement with that result, because it's seen as the very beginning of a turnaround. An analyst from Barclays said of the turnaround, "traction is finally building." 

What's been building for so long is the change from burger chain to slightly nicer burger chain. While that may seem like a small thing, Wendy's has put a lot into the business to make it happen. The company is planning to redo many of its corporate locations to give them a fresher feel. It also wants to change up the menu offerings, effectively moving itself closer to the fast-casual side of the scale.

The challenge for the company is how to walk the line. It still wants to be a fast-food place, but it wants to offer items to people looking for a slightly more upscale dining experience. That means introducing things like the Pretzel Bacon Cheeseburger to entice -- sort of -- picky diners.

Walking a thin line
The difficulty that Wendy's has had, and will continue to have, I think, is that it's very hard to be all things to all people. The idea of being the better burger chain means that Wendy's is going to be competing not only with McDonald's (NYSE: MCD  ) and Burger King, but also Five Guys and In-and-Out Burger.

If Wendy's can do it right, that could be a great move. McDonald's reported underwhelming earnings earlier in the week, and the company blamed much of the softness on larger economic issues. The fact that the market is now seemingly saturated with similar chains means that Wendy's could break out of the pack and make for the blue waters of high-end burger heaven. Five Guys, for instance, is thought to be the fastest growing fast-food joint in the US, with sales approaching $1 billion annually. That's a place where Wendy's could get comfortable.

The difficult road ahead
But it might not work. Wendy's has been laboring under its "Image Activation" plan since 2011, and the business hasn't really expanded by leaps and bounds. In its most recent announcement, Wendy's also announced that it's going to sell off about 425 locations, putting them in the hands of franchise operators. That, at least, seems like a straightforwardly great move. The extra cash will give the company more to work with, and the stability of franchise income makes investors happy.

The only question now is, "Is it worth it?" The stock is trading at a heavy premium because of its "imminent" turnaround. I'm not tempted. There are other businesses -- Starbucks and Panera Bread come to mind -- that are doing very well, cost less, and seem like a smaller risk. For now, I'm sticking with well-defined businesses. Maybe in three years, Wendy's will be something other than a company in transition, but I'm not going to hold my breath.

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Related Tickers

9/30/2016 4:00 PM
MCD $115.36 Up +0.57 +0.50%
McDonald's CAPS Rating: ***
WEN $10.80 Up +0.19 +1.79%
Wendy's CAPS Rating: ***