Wendy's (NASDAQ:WEN) is the third largest quick service restaurant chain in the world, but it still has a long ways to go to catch up to McDonald's (NYSE:MCD) as measured by market cap. While McDonald's has a market cap of around $95 billion, Wendy's has a market cap of just $3.5 billion. This means there's a lot of opportunity for growth and taking of market share, which Wendy's seems to be doing steadily as once again evidenced by its preliminary 2013 report.
The preliminary report
On Jan. 13, Wendy's issued a preliminary report into its fourth quarter and full year 2013 results and an outlook for 2014. For the fourth quarter, the company expects to report that same-store sales climbed 3.1% as compared to a 0.2% decline last year. Adjusted earnings soared 25% - 37.5% to $0.10 - $0.11 per share. Analysts had only been expecting earnings per share of $0.06 so this is an enormous beat. For 2014, Wendy's expects same-store sales to climb another 2.5% to 3.5%, with earnings per expanding 13% - 24% to end up between $0.34 and $0.36.
CEO Emil Brolick credited the past success with "tremendous strategic and financial progress" that it achieved through brand positioning, brand transformation, and system optimization. This caused Wendy's to achieve certain financial targets "well ahead of expectations." The company sold 415 company-owned restaurants to franchisees, has a pipeline of product and marketing plans, and expects to more aggressively transform its image at double the pace in terms of number of restaurants in 2014 as compared to 2013.
Wendy's is so confident going forward that it announced a new $275 million share buyback program in conjunction with its preliminary report. This comes out to around 8% of the company's market cap around the time of announcement. Often an aggressive buyback such as this speaks louder than words about a company's confidence in the future.
Also during the call, Mr. Brolick offered some additional insights that Foolish investors should pay close attention to. He noted that part of the reason for its current and future success is Wendy's ability to resonate with the customer. Customers are starting to see Wendy's as an innovator again with new menu items such as the Pretzel Pub Chicken sandwich, the Pretzel Bacon Cheeseburger, and the Bacon Portabella Melt on Brioche. As a result, Wendy's has been seeing market share gains against mid-tier restaurants, casual restaurants, and other quick service restaurants.
McDonald's will report its fourth-quarter earnings on Jan. 23. The last we heard, McDonald's growth seems to have been slipping and sliding. Last quarter, U.S. same-store sales gained a small 0.7%. That number became only a gain of 0.2% for October and retreated 0.8% in November. Part of the reason may have something to do with the failed Mighty Wings launch turning off just enough customers, but perhaps companies such as Wendy's are chiseling off just enough market share from McDonald's to speed its decline. CEO Don Thompson blamed "ongoing competitive activity and relatively flat industry traffic trends" in the last quarter. Part of that competitive activity certainly is coming from Wendy's.
Foolish final thoughts
Despite Wendy's impressive growth, its valuation at current prices still seems much more speculative than that of McDonald's. Wendy's trades at around a 25-26 P/E ratio based on the company's 2014 expectations while McDonald's trades at just a 16 P/E ratio based on 2014 analyst estimates. Using the mid-point of Wendy's estimates and guidance, the growth rate of earnings compared to 2013 is nearly triple that of McDonald's. Fools looking for a better growth story that can shoulder a higher risk premium should take a closer look at Wendy's.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends 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.