As a value investor, I often look at companies in trouble. Sometimes I think the situation is overblown . and sometimes I don't. Fast-food restaurant operator Wendy's International
Citing a more aggressive financial policy, a lack of diversification, and "an increase in leverage at a time when the Wendy's business is underperforming the quick-service restaurant industry," Standard & Poor's lowered its credit rating for Wendy's last week from BBB- to BB+, into the realm of junk. As of this writing, Moody's has not taken any action since its May 3 cut to Baa3, its lowest investment-grade rating.
Apparently, Standard & Poor's thinks that the Hortons divestiture is not in the company's best long-term interest and might be driven by shorter-term motivations. The ratings downgrade came the day following the spinoff announcement and included comments on a "lack of diversification after the spinoff of Tim Hortons." The report also noted that Wendy's financial policies have become more aggressive over the past year, after several fund-management companies had acquired large holdings.
The company said it's spinning off Tim Hortons primarily to concentrate on its core business. Such concentration is not a bad thing, but keep in mind, again, that Tim Hortons has been a successful part of Wendy's for the past 10 years. Even so, franchise owners would agree on a need for concentration. They've recently complained that the company has gotten away from being the "quality brand" of fast food. As part of an initiative aimed at reclaiming that title, the company has introduced some new menu items and is offering several choices besides French fries as the accompaniment for its combo meals.
Adding to the company's problems, Chief Executive Officer John Schuessler retired somewhat abruptly in April. Something like that is always a red flag for me, as I have written before.
The company once famous for "where's the beef?" is now having trouble finding that beef. Unhappy franchise owners aren't a good sign, but having to hunt for a new CEO is even worse. And the recent credit rating downgrade doesn't help at all. While the problems are all fixable, I would stay away from Wendy's as a long-term investment until the company shows signs that it is turning around.
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Fool contributor Jim Mueller likes to have chili with his burger, instead of fries. He does not own shares in any company mentioned, and he has assured us that he follows the Fool's strict disclosure policy.