We upgrade our recommendation on
The Wendy's Co.
) from Neutral to Outperform based on decent first-quarter 2013
results reported earlier this month and increased earnings
guidance despite volatility in the US quick-service restaurant
Why the Upgrade?
On May 8, Wendy's posted decent first quarter results and also
increased its bottom line expectation for 2013. Even amid a
volatile US quick-service restaurant industry marked by faltering
consumer confidence and heightened competition, Wendy's expects
to record increased year-over-year profitability in each of the
first three quarters of 2013, buoyed by sales leverage and cost
In its recently-concluded first-quarter 2013, Wendy's reported
adjusted earnings of 3 cents per share, beating the Zacks
Consensus Estimate as well as the year-ago earnings by a penny.
Earnings in the quarter received a boost from top-line growth and
margin expansion at the company-operated restaurants. The
company's 'Right Price, Right Size Menu' initiative also pushed
up earnings during the quarter. Wendy's continues to gain market
share, driven by price value proposition and premium limited
The company also raised its earnings per share guidance to
reflect net cost savings from debt refinancing. Its adjusted
earnings per share are now expected to be within the range of
20-22 cents per share, up from the prior expectation of 18-20
cents per share. The revised adjusted earnings per share range
represents an estimated year-over-year increase of 18%-29%.
Basically, the company is in a transition mode since the sale of
its counterpart Arby's brand in 2011. Management expects to incur
lower overhead expenses as it will only have to support a single
brand. Going forward, several of its growth initiatives like
elimination of unprofitable operations, restaurant reimaging, and
expansion in domestic and overseas markets should bode well for
The Wendy's currently carries a Zacks Rank #2 (Buy). Some players
in the same industry, which look attractive at current levels,
Domino's Pizza Inc.
The Cheesecake Factory Inc
Burger King Worldwide Inc.
) all carrying a Zacks Rank #2.
BURGER KING WWD (BKW): Free Stock Analysis
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WENDYS CO/THE (WEN): Free Stock Analysis
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