Hamburger joint Wendy's (NYSE:WEN) has always been known as the "premium" cheap-burger destination. But with a trailing P/E of 131, Wendy's, the stock, appears to be priced far past premium. Barring a collapse in the stock price, though, the only way to bring that P/E down is to boost earnings. Tomorrow, the company will get that chance, when it releases its preliminary results for Q4 2005.

Wall Street Wisdom:

  • General consensus. Of the 17 analysts tracking Wendy's fortunes, eight rate the company a "hold," and "sells" outnumber "buys" 2-to-1 among the remainder.
  • Revenues. Analysts expect Wendy's to report a 3% sales slide tomorrow, down to $949 million.
  • Earnings. Profits, in contrast, are expected to rise 7%, to $0.47 per share.

Margin watch:
Wendy's gross and operating margins have been on a downhill march for some time now. But I'll bet the collapse in rolling net margins really gets your attention on the chart below, right?

Margins %

6/04

9/04

1/05

4/05

7/05

10/05

Gross

26.3

29.4

24.7

25.0

24.1

23.7

Op.

13.1

13.1

12.0

11.4

11.3

11.1

Net

7.5

7.3

1.4

1.5

1.3

1.4
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
Well, no need to fear on that score. The net nosedive began in January 2005, with the company taking more than $200 million in one-time charges -- which appear to have actually been one-time, since, aside from a $10 million asset writedown last quarter, they haven't been cropping up since. The good news here is that rolling margins reflect a one-time hit for the three subsequent quarters and then bounce back. Tomorrow, we'll see how high Wendy's burgers can bounce.

Foolish outlook:
There's a veritable plethora of issues on our radar for tomorrow, considering that Wendy's is going through a whole lot of changes in an effort to get its business back on track. Since last quarter, Wendy's has spent $207 million to buy back 3.75 million shares. It paid off $100 million in debt back in December and has slowed down the opening of new restaurants -- a move that should decrease capital expenditures and help to boost free cash flow, which, in turn, can be used to buy back more shares and/or pay down more debt. I suspect that between a margin bounceback and improved free cash flow, Wendy's news tomorrow will be of the good sort.

Fool contributorRich Smithdoes not own shares of Wendy's.