Deep Value at Wendy’s

This Thursday, Wendy’s/Arby’s Group (WEN) will report its earnings. My prediction is that earnings will be seen as either very good news or very, very bad news. (Impressive analysis, no?)
The reason why I’m highlighting Wendy’s is that it’s a good example of what you often find in value investing. I’m not terribly impressed by the business but the market, as evidenced by the share price, is far less impressed. It’s the gap between perception and price that value investors seek out—even if that still leaves you with a mediocre company.
Wendy’s business has not been doing well, but at $5 the stock is well below its true value. The stock is even going less than book value which is $5.16 per share. In September 2008, (Triarc the owner of Arby’s) bought Wendy’s for $2.34 billion. We can now see that the merger isn’t working out. The Wendy’s side of the business has been sluggish but it’s the Arby’s side that’s really hurting things.
The company is investing lots of money in an effort to turn things around. I’m skeptical but at least they’re trying. Arby’s is getting killed at the price level, so management is aiming to expand their value meals. To give you an idea of what Wendy’s/Arby’s Group’s valuation is like, the current price/sales ratio is about 0.62. At McDonald’s (MCD), it’s 3.35.
The arguments in favor of Wendy’s/Arby’s Group is that the company is profitable, albeit barely. They also pay a very modest dividend. I think a good way of looking at the stock price is seeing it as the sum total of two very different outcomes. I’m making up these numbers but I think it will illustrate my point. Let’s say that the market thinks there’s a 25% chance WEN will go to $14 and a 75% chance that it will go to $2. The whole adds up to $5 but you can see that just under the surface are wildly divergent views.
I don’t know if management’s plans will pay off but we’ll get a hint this Thursday. I think the stock is a good, but highly risky, buy.

Posted by on May 10th, 2010 at 1:07 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.