The steady stream of menu buzz and upbeat news that propelled Wendy's (WEN) shares nearly 86% higher last year has been largely absent in recent months, leaving investors with a stock that's lost ground while its competitors have continued to rise.
Last year Wendy's benefited from a strong market, a better restaurant sector, and an even more powerful showing by beef-related shares, but it also earned the advance with what it did on its own. Yahoo Finance named it the restaurant stock of the year, as several factors contributed to its run-up — restaurant remodels, new marketing campaigns, popular limited-time sandwiches, higher dividend payments and a reduction in the number of stores it owns.
Many of the positives remain for a restaurant operator whose stock had dropped in four of the five years prior to 2013's surge. Momentum, however, has ebbed, and shares have lost 6.4% in '14. There's been no dividend raise, no offering to match the Pretzel Bacon Cheeseburger, no significant changes to cost structure.
Is the slowdown a matter of Wendy's having gotten ahead of itself, of a stock in need of deflation? That certainly could be argued, though it must be pointed out that two other top burger winners from last year — Sonic (SONC), up 93.9%, and Jack in the Box (JACK), a 74.9% climber — have added 2.2% and 14.7%, respectively, since the beginning of January. At the same time, McDonald's (MCD), the largest of the group and the biggest restaurant chain by sales, recently reached an all-time intraday high of $103.78. Wendy's itself had a multiyear peak of $10.27 in February.
The substantially greater reason for concern has been announced since: Trian Fund Management, the hedge fund that's Wendy's largest investor and at which non-executive Chairman Nelson Peltz is a founder, reduced its position in the first quarter by 18.2 million shares. It still owns 17.7% of Wendy's, and Peltz holds another 4.5%, but the reduction was something that hadn't happened in at least five years, according to FactSet data.
It's understandable Trian would want to book some profits after the increase. That said, other investors obviously won't be inclined to stay involved if it sells further.
Still, with the weakness relative to its peers, Dublin, Ohio-based Wendy's is now the only stock in its immediate segment trading at a discount to its normal forward multiple. That doesn't mean it's necessarily cheap, but compared with similar operators, it's the lone name lacking a price-to-earnings ratio premium. That hints that either the others need to come down — and they well may — or Wendy's needs to catch up.
The challenge for the latter situation is that many restaurant stocks have been muted this year after a hefty rally in '13, so that won't be easy. Overall, the market itself has been testy, although the S&P 500 is still setting new records. If that persists, the industry should get some residual lift. Considering Wendy's is one of the losers in the arena, it may be seen as a better option for upside when traders look for potentially undervalued stocks.
Potentially is the key word. Wall Street undoubtedly has cooled in its opinion. From September through December, 33% of analysts who follow the stock had a buy rating, according to FactSet. That's down to 24% now. Meanwhile, the percentage of sells has doubled from 6% at the end of the year to 12% today. The consensus price target sits at $9.16, whereas the recent market price was $8.16.
Among these fast-food burger shops, only Arcos Dorados (ARCO), a McDonald's franchisor in the Caribbean and Latin America, has been worse:
--Jack in the Box: +14.7%
--Burger King (BKW): +10.8%
--Carrols Restaurant Group (TAST): +8%
--Arcos Dorados: -26.4%
Of the group, Wendy's has the highest next-12-months earnings multiple over the past five years, at an average of 25.9. At the moment, it's a 22.7. Carrols doesn't have a P/E available because losses are expected in the near term, but the others are as follows:
--Jack in the Box: Current P/E 21.9, average 14.9; premium 7 points
--Sonic: 22.2, average 15.8; premium 6.4
--Arcos: 23.8, average 21.9; premium 1.9
--Burger King: 25.2, average 23.6; premium 1.6
--McDonald's: 17, average 15.6; premium 1.4
Clearly, Wendy's is notable for its absence from the premiums list. In terms of price/earnings-to-growth ratios, the case is a bit tougher. Here, Wendy's has a 1.6, slightly above its 1.5 average for five years. However, it still compares well with the others. Arcos is a 0.9, matching its average, but the rest are between 0.2 and 0.5 points above theirs.
Will Trian be more interested at this level? For Wendy's to get turned around, it needs buying, not selling, from the fund. It could stand a strong follow-up to the pretzel bun to boost same-store sales — the Tuscan Chicken on Ciabatta doesn't have quite the same pop. And a sturdier restaurant space in general, as well as a confident market, wouldn't hurt either.
If that happens, the P/E discount could vanish quickly. Otherwise, Wendy's may be left looking up at its competitors for the rest of this year.
- Consumer Discretionary