Wendy's is caught in a fast-food pickle

Consumers say its offerings taste better than the competition's, but its stock isn't so desirable, especially compared with McDonald's.

By Jonathan Berr May 13, 2013 9:32AM
If success in the fast-food business were based on quality alone, Wendy’s (WEN) would be sitting pretty. Market researcher Technomic has found that consumers prefer the chain's food over rivals McDonald's (MCD) and Burger King (BKW)  by a wide margin. But fast-food or quick-service restaurants need to attract consumers concerned about price -- and that's where things get complicated.
As The Wall Street Journal recently noted, Wendy's is in a race with McDonald's for the so-called value customers, with the former ramping up promotions of its value menu dubbed "Right Price, Right Size." But beating the home of the Golden Arches at its own game will be tough.

And so far, the results have been mixed.

Net income at Dublin, Ohio-based Wendy's fell to  $2.13 million, or one cent a share, down from $12.4 million, or three cents a share, a year earlier. Excluding one-time items, profit was 3 cents per share. Revenue increased 1.8% to $ 603.7 million. Wendy's was expected to earn 3 cents per share on revenue of $614 million.

An employee pours a soft drink at a Wendy's fast food restaurant in Moscow, Russia, on April 5, 2013 (© Andrey Rudakov/Bloomberg via Getty Images)Wendy's CEO Emil Brolick has admitted the chain is struggling with value customers even as sales grew in April. These patrons are important given their frequent patronage of fast-food restaurants. McDonald's and Burger King are also courting them.

To be fair, McDonald's is struggling, too. Last month, its same-store sales rose 0.7% in North America. Wendy's did better on that metric, posting a 1% same-store gain in its home market.

However, if investors are going to bet on the fast-food market, McDonald's is the way to go. It has a market value topping $100 billion, giving it the financial heft to attract cash-strapped consumers without crushing its profit margins.

McDonald's stock is also far more reasonably valued, with a price-to-earnings multiple of 18.53. Wendy’s, by contrast, carries a P/E of near 1,500. The 52-week price target on McDonald’s is $106.67, about 7% higher than where it trades now.

Wendy's food may be delicious, but its stock is more likely to leave a bad taste in investors' mouths.

Jonathan Berr owns shares of McDonald's. Follow him on Twitter @jdberr.

 
Tags: MCDWEN
47Comments
May 13, 2013 10:28AM
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Love Wendy's.  Way better than McDonalds.
May 13, 2013 10:59AM
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We usually don't eat much fast food.  However, in the past couple of months we have tried McDonald's.  We found the food to be scaled down and nasty.  It was not as flavorful as in the past.  WENDY'S HAS EXCEPTIONAL FOOD FOR IT BEING  'FAST FOOD'   IT APPEARS FRESHER, THE APPEARANCE IS BETTER.  BURGER KING IS IN THE MIDDLE SOMEWHERE...WE HAVE GRANDCHILDREN VISITING AND THEY LIKE TO GET THE 'TOYS IN THE CHILDREN'S MEALS...
May 13, 2013 12:08PM
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The writer states that Wendy's P/E is near 1,500????? Actually, their 2012 P/E was around 36 and the 2013 ratio is projected to drop to around 29. These writers are so full of crap it's like reading 3rd graders letters to the tooth fairy.
May 13, 2013 1:30PM
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Wendy's is far better than other fast food services !
May 13, 2013 12:43PM
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Had 2 "Whopper Jr." last week for the first time.  You know, the one advertised for $1.29.  The bun was the same size as any other vaule hamburger - similar to Wendys and McDs, but I opened it & had a 1987 Wendy's flashback! "Where's the beef???" No kidding - the patty was 2" in diameter.  I'll stick with the Wendys value menu, thx.
May 13, 2013 1:07PM
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the problem is nobody can compare with In N Out if they want a good quality burger...they always use fresh ingredients...you can watch them cut their fries from fresh potatoes, right there in front of you. if I want a burger and fries, that's where I go

May 13, 2013 11:55AM
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to go to fast food plaes is not much cheaper than slow food restaurants.Except, I don`t

have to tip.

May 13, 2013 1:31PM
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This article is simply not true the reason Wendy's is not doing as well as McDonald's is simple numbers when seemingly every town has a McDonald's it is obvious who will get more business. Wendy's problem is they just do not have the number of locations that their competition does. I like Wendy's but the nearest to me is around an hour away, and the nearest McDonald's is like 15 minutes away.
May 13, 2013 11:53AM
May 13, 2013 10:56AM
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Wendy's food tastes better but it's prices are much higher than the competition. I like to eat two Wendy's chicken sandwiches which costs about $9.50. Two homestyle chicken sandwiches from McDonald's are $6.00 and same goes fro Chick-Fil-A, $6.00 also.
May 13, 2013 10:44AM
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When my son (now 10 years old) was about 1-1/2 to 2 years old he used to sing "Ba Da Ba Ba Ba" in the car. I didn't put it together right away but then I noticed it was always as we were passing by a McDonalds. It is (or was) there theme song at the time followed by "I'm lovin' it"  And even at that young age he related those golden arches with their commercial. There advertising is aimed at children and it works.

May 13, 2013 12:22PM
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I can remember when all 3 of the big chains were desirable destinations in their own right. Over time though, they have become more conscious of shoving food out the window in the shortest minute rather than maintaining the quality of the product. I can't recall opening a wrapper to find a well constructed and hot sandwich. I'm referring to a "freshly" made (still warm) sandwich that wasn't slobbered with condiments to the point that you couldn't keep the bun in tact. McDonalds fares better due to the lack of tomatoes on their popular sandwiches, although the McRib destroys this advantage due to more sauce than bread.  All things considered though, Wendy's does have the edge on taste if prepared the way intended when they began operations, but none of them really deserve their level of revenues until they clean up the drive thru quality. Unfortunately, they probably won't address the issue as most customers won't take the time to complain because the frequency of complaints would be staggering!

May 13, 2013 1:13PM
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have stopped eating at mcd's, BK and wendys, poor food quality is really what will kill them.  burgers just don't taste good and if I want chicken I'll go to chik fil a or popeyes....
May 13, 2013 1:38PM
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Wendy's service, nearest our home, is horrible.  Doesn't matter how often I complain, they never respond to my email complaints.  Love their food but we only eat Wendys if we are near one

away from the one nearest our home.

May 13, 2013 12:39PM
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The one thing Wendy's doesn't have that Mc Donalds and Burger King have is a soda machine outside of the back counter. If you eat in at MD or BK and you want a refill on your drink you just go up to the beverage machine and do your own refill. At Wendy's you have to pay for a refill.  
May 13, 2013 1:07PM
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Wendy's quality went down while the price went up and they eliminated a lot favorites in favor of higher priced but lower value menu items.  About the only thing they did right was the chilli cheese fries.  That new menu board is terrible too.  Hard to read for people with declining eye sight.
May 13, 2013 4:21PM
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It's remarkable how this article is attempting to relay financial information, and the posts are largely about "oh I like their food" or "this one is cheaper". 

 

Folks, this is about the economical status of a chain, not about "Do you like the food".

 

For the rest of those who do have a clue, and are financialy literate.  (No wonder there's so many begging for entitlement handouts, most don't understand money.)   I digress, the comparisson between both chains and the R.O.I. is largely vast.  Income from Sales differ in the billions, Wendy's income growth is a terrifying - 69%, net profit margin is at -0.18%, it's Debt Ratio 0.74, EPS -0.01  Compare that to MCD income growth -.70, Net Profit 19.79%, Debt Ratio  N/A .EPS 5.39.  No way would I ever touch Wendy's stock with those numbers. 

May 13, 2013 10:58AM
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I used to love Wendy's hamburgers and fries.  Hadn't tried them since they switched their fries, but thought I'd try it again the other day.  Other than the wrapper, I guess the hamburger hadn't changed much, but lord the fires.  Just not the same.  I don't know if it's the sea salt or the stupid skins on the fries, but they really went downhill. I despise fries like that and don't know why in the world they had to change such a good product.  I remember when Wendy's first opened and things were much, much better back then.  So was MacDonalds, as a matter of fact. 
May 13, 2013 1:54PM
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I go to Wendy's, McD's and BK. They all treat me nice. Wendy's os best overall. McD's #1 for fries. BK had the best dbl cheeseburger but now it's just microwave.
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