Wendy’s: Time To Limit The Downside

The Wendy's sign is seen outside their restaurant in Bowie, Maryland on May 9, 2017. (Photo credit: JIM WATSON/AFP/Getty Images)

Placed at the third place in U.S. QSR industry as per market share, the Wendy’s Company (NYSE: WEN) seems to have alienated the value-conscious burger lovers in recent years as indicated by more than 30% decline of sales in 2016 and 2017.

Despite the franchise-focused strategy, WEN’s revenue from franchises grew at c.16.7% YoY in 2017 (cf. c.21.6% YoY in 2014) while operating margin, stood at c.34.5%, well below c.75.1% and c.72.6% of McDonald’s Corporation (NYSE: MCD) and Restaurant Brands International Inc. (NYSE: QSR) respectively. Amid rising costs from the system optimization initiative and Image Activation program, WEN’s net debt to EBITDA ratio increased to c.7.6x in 2017 (from c.2.9x in 2014), while MCD and QSR maintained it at c.2.5x and c.5.6x respectively.

Given the above concerns, I believe WEN’s forward P/E ratio of c.26.7x is overvalued compared to 21.6x of MCD and 22.8x of QSR. However, the upside potential of the stock cannot be discounted either as margins are improving amid new strategies while the industry consolidation is expected to gather momentum.

Therefore, to participate in possible gains in stock price appreciation while limiting the losses from the stock price decline below the intrinsic value, WEN’s investors could adopt a protective put whereby the stock is combined with a long put option.

Read the Full Article at:

https://seekingalpha.com/article/4239864-wendys-time-limit-downside
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