Please ensure Javascript is enabled for purposes of website accessibility

Why This Burger Stock is a Must-Buy

By Ranu Devi - Sep 4, 2013 at 5:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wendy’s is poised for long-term growth with their reimaging program and the launch of the pretzel burger.

When it comes to the quick-service restaurant industry, or QSR, two of the big players that come to my mind are McDonald's (MCD 1.12%) and Burger King (BKW.DL). However, there is one more company that deserves attention: Wendy's (WEN 0.52%). Wendy's is well known for its great-tasting burgers, salads, and sandwiches. 

Reimaging program continues

In order to improve its market share, Wendy's came up with its Image Activation Program and introduced new menu items.

The Image Activation Program is a part of Wendy's rebranding process and "Recipe to Win" strategy, which is comprised of a new logo, stylish staff uniforms, updated menu boards, restaurant signage, new innovative products, packaging, and renovation of both interiors and exteriors.

In 2012, it reimaged 60 stores and by the end of 2013, the number of reimaged stores will be around 100. Wendy's expects to reimage 50% of company-operated stores by 2015. So far, reimaged stores have achieved first-year sales gains of around 25% and sustained increased sales (after year-one) of about 20%.

Wendy's will invest around $470 million in this program. The reimaging has also led to the closure of some Wendy's stores. To offset the revenue loss from store closures, Wendy's is luring franchisees with a $100,000 incentive for the remodeling initiative.

Its competitors Burger King and McDonald's are also motivating their franchisees to undergo low-cost remodeling projects. Burger King is aiming for 100% franchise stores by the end of 2013 to achieve a better operating margin in the future. It is taking global opportunities by entering into Joint Ventures, or JVs. In 2012, it signed JVs in Central America, Russia, South Africa, Mexico, and China. 

McDonald's is pushing its value offerings in the slow European market by introducing value products like Mc-Deal and combo offers with a Casse croute, or snack and value meal, menu. In the APMEA market, it is targeting store growth with tailored local offerings to boost its presence in the region. In the U.S., new product launches such as Chicken Wings, Fish Mcbites, and the Filet-O-fish sandwich are expected to drive sales for it in the second half of 2013.

More emphasis on franchising

To further accelerate its remodeling program, Wendy's plans to sell 425 of its 1,427 North American company-operated restaurants to franchisees by June 2014. This refranchising program would drive the franchise mix at Wendy's from 78% to 85%. The refranchising will increase Wendy's 4% of sales royalties, and it aims for rent of 7% of sales, representing a predictable flow of revenue and earnings.

It has already sold 24 Wendy's restaurants to NPC International in the Kansas City market for $9.3 million. The restaurants generated $33 million in annual sales. It sold these restaurants for five times the franchisee's EBITDA. NPC recently signed an agreement to acquire another 13 Wendy's restaurants in the same market from another franchisee.

Wendy's also sold five restaurants in the Kansas market to Kirk Williams of Legacy Restaurant Group. The remaining restaurants it plans to sell are anticipated to generate roughly $160 million in proceeds.

Pretzel Bacon Cheeseburger

After product testing in Cleveland, Miami, and Sacramento earlier this year, Wendy's claimed that the burger outperformed any other promotional hamburger in recent Wendy's history. The new burger costs $4.99 for a single and $5.99 for a double. Analysts expect that the new burger could increase same-store sales by 3%, or even more, in the third quarter. 

Valuation

Wendy's also underwent debt refinancing in the middle of 2013, which will save around $25 million in interest expenses per year. It has the lowest amount of debt compared to its competitors. Its enterprise value to EBITDA ratio shows that it has the best growth opportunity of the three companies. The price to book value ratio is also lower than that of the other two burger giants (price to book value ratios of less than one offer attractive investment opportunities). All these ratios indicate that Wendy's is still an undervalued stock.

Company

Dividend yield

Price/Sales ratio

Debt to Equity ratio

Enterprise value to EBITDA

Price to Book Value ratio

PEG ratio

The Wendy's

2.8%

1.17

0.7

8.6

1.48

1.1

McDonald's

3.1%

3.58

1

10.4

6.5

1.7

Burger King

1.28%

4.86

2.8

11.6

5.32

1.1

Conclusion

With continuous momentum in its reimaging program, success with the pretzel burger, and cheap stock valuation, Wendy's has excellent potential for long-term growth. If the remaining reimaging restaurants experience a strong boost in sales, Wendy's stock will see an upside. I recommend a strong buy for Wendy's.

McDonald's has been a consistent performer suitable for low-risk seeking investors. I suggest holding the stock.

As far as Burger King is concerned,  its investors are gambling on its transformation toward the franchisee model. I recommend holding this stock as well. 

Ranu Devi has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$262.18 (1.12%) $2.90
Restaurant Brands International Inc. Stock Quote
Restaurant Brands International Inc.
BKW.DL
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$21.40 (0.52%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.