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Wendy's Makes a Habit of Beating Earnings

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Even though the Image Activation program has only begun to start in earnest, Wendy's (NASDAQ: WEN  ) has already generated a habit of beating expectations. In reality, the restaurant chain hasn't generated mind-boggling comps growth yet, but Wendy's has been performing better than management's plan expected. When the investment community has confidence in a company's plan, the company's stock tends to perform better.

In 2012, Wendy's undertook its Image Activation plan to modernize the look of its restaurants and spent heavily to innovate new products that included the pretzel bun. The 6,550-store restaurant chain has seen its stock appreciate roughly 100% in the last year on improved results and excitement over the updated corporate strategy.

The company competes in the massive $435 billion restaurant sector directly against McDonald's (NYSE: MCD  ) and Burger King Worldwide (NYSE: BKW  ) . The company plans to take market share by innovating and reimaging the brand to make it more attractive to consumers.

Stronger results
For the fourth quarter, Wendy's reported the all-important beat and guide higher. Investors appreciate a management team that delivers better results than expected even if the actual numbers are only average.

For the quarter, Wendy's company-operated comps were up 3.1%. The company expects earnings of at least $0.10 per share versus the consensus estimate of only $0.06. This continues a trend over the last year of Wendy's handily beating estimates as four of the last five quarters have seen impressive beats by at least 33% more than analysts forecast. Even more important, Wendy's guided up for 2014 earnings to reach $0.35. The analyst consensus only expected $0.29.

Though the market is excited about the Image Activation campaign, the company only modernized 199 stores during 2013. In total, only 300 restaurants out of 6,550 have been updated. Wendy's will pick up the pace in 2014, but its plans only include updating roughly 400 of the existing stores during the year. At the end of the year, a total of only 700 locations, or barely over 10% of the chain, will be reimaged. In reality, a major portion of the customer base might not even view a reimaged store by the end of this year.

Gaining against the big boys
Wendy's has shifted toward only owning 15% of the store base after completing several exit transactions this year to raise cash. The Wendy's franchise model is similar to the business model of McDonald's, which now has a massive market cap of $94 billion on revenue of nearly $30 billion. Even Burger King has a market value of over $8 billion and nearly double the locations of Wendy's, which has a minuscule $3.5 billion market cap currently.

In comparison, McDonald's has 35,000 locations in over 100 countries. Its restaurants are worth roughly $2.7 million per location while Wendy's only has a value of $580,000 per location. Burger King's restaurants are valued similarly at roughly $610,000 per location, even though only 1% of its stores are company-owned.

Comps at Wendy's might only appear average, but they are rising while domestically McDonald's saw a decline during November and a small 0.1% gain for 2013 through November. On the flip side, Wendy's saw 1.9% comps growth during the full year and this has increased as the modernization plan expands. For the third quarter, Burger King saw a domestic decline in system-wide sales with comp sales declining 0.3%.

Much of the growth for McDonald's and Burger King has come from international locations. McDonald's has been an international growth story for a long time and Burger King now operates nearly 50% outside the U.S. With only 400 international locations, that area provides Wendy's with another catalyst for long-term growth once the Image Activation plan makes more progress.

Bottom line
Investors have pushed up the stock price of Wendy's for a good reason. The company has been generating the best comps of the group, yet the long-term benefits of reimaging the store base have hardly kicked in yet. Most of the gains so far have come from product innovations which highlights that Wendy's has turned the quarter as a corporation. Wendy's may have years of growth and market share gains ahead which makes the stock an interesting long-term investment even at these higher prices.

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Mark Holder

Mark has been writing for TMF since Dec. 2012 with a primary focus on taking advantage of opportunities provided by the market in the energy and tech sectors.

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