This fast-food chain is ripe for buyout

Wendy's has launched a broad turnaround plan, which could pique the interest of private equity.

By InvestorPlace Mar 6, 2012 6:16PM

Image: Family eating burgers (© Bananastock/Jupiterimages)By Lawrence Meyers


There's no doubt that the market loves McDonald's (MCD). The company benefited from an economic downturn that drove more customers to low-cost meals, and it introduced a broadside attack on Starbucks (SBUX) with its wildly successful coffee line.


But there's just not much room in investors' hearts for the other fast-food brand, Wendy's (WEN). No matter how you slice the burger, Wendy's is outgunned by the clown. That doesn’t mean it can't survive in the market, but it is struggling. However, there might be some value in the company that just might trigger a private-equity buyout.


The company's recent earnings report included an announcement of a three-year turnaround plan. I think this is a smart idea.


Let’s start with the fact that, until now, Wendy's had ceded the breakfast meal to its competitors. That's about to change.


Also, McDonald's has played around with some of its location design and did so without changing the company's image. Wendy’s is following suit. The truth is that fast-food joints can either be really clean with a contemporary look or old and crappy with a design that hasn’t changed in years. The turnaround does, in fact, kick off with redesigns of its restaurants, and I dig what I'm seeing.


Financially, Wendy's is holding its own but not really growing. Revenue was basically flat, and operating profit declined 8% recently. The company is tottering under $1.3 billion in debt that has debt service of $114 million -- which ate up all but $23 million of its operating profit in 2011. The company used much of its cash flow to buy back about 5% of its shares. Now it’ll take its $475 million in cash and cash flow from operations to engage in capital spending, expansion and renovations.


The story reminds me a lot of Carl's Jr., which faced numerous challenges over its history and at one point saw its stock hit $2. The company turned things around and was bought out for $12.55 per share. I think Wendy’s might be in position for the same treatment, particularly if the turnaround yields results. And before anybody writes Wendy's off, let’s not forget that it is the No. 2 burger seller in the country, ahead of Burger King.


Wendy's is a speculative buy at $5 per share. Downside is limited, and there's the potential for the company to double from here over the three-year turnaround period. That also discounts the possibility of a private-equity buyout.


As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.


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2Comments
Mar 7, 2012 12:59AM
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McDonald's success is geared from its origin.  In the very beginning, Mc'ds went after children.  The clown, toys in meals and other things for kids.  Why, because they knew that mom and dad always want to  make the kids happy.  (hence the meal)  Get the kids in the door and you have it made.  As for cheap food, maybe many years ago, but take a family of 4 there, and you will be surprised how much money you will spend.  For me, the best fast food hamburgers come from Wendy's and Burgerking.  
Mar 7, 2012 12:04PM
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I'll go to McDonalds for breakfast but, if I want a burger, I go to Burger King or Wendy's 99 times out of 100. The reason is simple, quality.

McD is obviously very successful but with that success comes a huge target. There are groups of people/companies out to get them. They are targeting everything from the quality of the products, to their playgrounds not being sanitary (as if any playground on the planet is sanitary), to making it illegal to have happy meal toys. Can you imagine McD earnings and stock price if they actually had to use quality products? That would be absolute gold for Wendy's and Burger King. You can bet it is going to happen eventually. The government is getting more and more involved and controlling out our day-to-day lives.

McD is probably the safe play in the near term but I'd take Wendy's over the long term as I believe they will turn it around and don't have near the issues McD is and will continue to face.
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