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3 Reasons Wendy's Might Be Your Best Choice in Fast-Food Stocks

Brian Nichols
November 19, 2013

Fast-food restaurants have stood the test of time, proving that no matter the economic environment, they remain noncyclical in nature. And while many might prove to be good long-term investments, there are three reasons that Wendy's (NASDAQ: WEN) is better than its peers McDonald's (NYSE: MCD) and Burger King Worldwide (NYSE: BKW).

Companies you know
With Wendy's, Burger King, and McDonald's, there really is no need to explain their businesses. All three are national chains with distinguished products: Burger King has the Whopper; McDonald's is famous for the Big Mac; and Wendy's has a selection of old-fashioned hamburgers. However, as an investment, the three don't look equal at all.

Product innovation
In the five years prior to 2012, shares of McDonald's soared more than 125%, not losing any value during the recession. While global expansion was in part responsible, the real reason for the gains revolved around strong growth in the high-margin McCafe business. McDonald's found a hit and then rolled out new flavors and sizes, and gave consumers an array of choices surrounding these beverages.

Now, Wendy's is doing the same with its pretzel burger, and neither McDonald's nor Burger King appears to have such a product. Wendy's pretzel burger is its best-selling new product in more than a decade, and this newfound growth driver should give investors a reason to be optimistic, as Wendy's rolls its pretzel concept on to other sandwiches.

Wendy's same-store-sales growth goes hand-in-hand with its pretzel burger. Back in August, following the launch of the pretzel burger, many analysts boosted their same-store-sales growth estimates to 5.5% from 3% for 2013.

In Wendy's last quarter, the company saw same-store-sales growth of 3.2%, suggesting the holiday season could be strong for the restaurant chain.

When assessing industries such as retail or restaurants, same-store sales are often the best metric of company growth and success. These are companies that can rapidly expand to increase revenue, but with expansion comes higher costs, and same-store-sales growth indicates that more consumers are buying more food per store. This ultimately drives margin growth.

In comparison, McDonald's has 0% to 1% same-store growth, and Burger King is even worse, barely breaking even. Hence, Wendy's is growing the fastest.

While Wendy's has the hottest product in fast food and is growing the fastest, it might not be a good investment if the stock is significantly more expensive than its peers. Thankfully, it's not. In fact, Wendy's is actually cheaper!

Wendy's trades at 30 times next year's earnings, which might appear pricey at first glance. Yet a closer look reveals that Wendy's trades at just 1.35 times sales and has an operating margin of 7.9%. In comparison, McDonald's trades at 3.5 times sales and Burg