Is Wendy's the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Wendy's/Arby's Group (NYSE: WEN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Wendy's/Arby's Group.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 29.8% Pass
  1-Year Revenue Growth > 12% (3.6%) Fail
Margins Gross Margin > 35% 23.3% Fail
  Net Margin > 15% (0.1%) Fail
Balance Sheet Debt to Equity < 50% 71.2% Fail
  Current Ratio > 1.3 1.95 Pass
Opportunities Return on Equity > 15% (0.1%) Fail
Valuation Normalized P/E < 20 42.23 Fail
Dividends Current Yield > 2% 1.7% Fail
  5-Year Dividend Growth > 10% (25.5%) Fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just two points, Wendy's isn't serving up anything close to perfection. The restaurant company hasn't handled a tough environment very well, as sales have fallen recently and profits have given way to losses.

It's a tough time for restaurant stocks. Like both fellow fast-food purveyor McDonald's (NYSE: MCD  ) and higher-end casual dining chains like Red Robin Gourmet Burgers (Nasdaq: RRGB  ) , Wendy's has had to deal with higher prices for beef, cheese, and other staples of its menu. That has sent its profits plummeting.

Yet Wendy's can't even claim to be doing as well as its peers. Jack in the Box (Nasdaq: JACK  ) and Yum! Brands (NYSE: YUM  ) both weigh in with much better net margins, yet they sport lower normalized earnings multiples than Wendy's does.

That's likely the reason why Wendy's is looking to take drastic action. The company wants to sell its Arby's chain, which has been a particular drag on the company's overall bottom line. After having spun off Tim Hortons (NYSE: THI  ) several years ago, that would leave investors with a pure play on the burger chain.

With plenty of competition, Wendy's hasn't answered the call lately. If it ever wants to be a perfect stock, it needs to start playing hardball with its more successful fast-food peers.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Wendy's/Arby's Group to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended McDonald's and Tim Hortons, as well as writing a covered strangle position on Red Robin Gourmet Burgers. The Motley Fool owns shares of Red Robin Gourmet Burgers and Yum! Brands. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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