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Wendy's Pursues a Delicate Balance

NEW YORK (TheStreet) -- Shares of fast-food giant Wendy's (WEN) are still struggling to find solid footing ever since Morgan Stanley analyst, John Glass, lowered his rating on the stock to "Underweight" from "Equal-weight" on March 1.

While setting a $5.00 price target, Glass suggested that the company's restructuring efforts may take longer than investors expect. However, it would seem the company's actually on schedule. And if fourth-quarter earnings serve as indication, Wendy's plan to be "A Cut Above" should produce gains above what the Street expects.

Change We Can Believe In

It wasn't that long ago that Wendy's was fighting for an identity. Despite its strong tradition of offering good food at competitive prices, the company could never overcome the dominance of McDonald's (MCD). And things got heated when Chipotle (CMG) began to sizzle in the premium quick-service restaurant (QSR) segment. Wendy's was stuck in limbo. It could not beat McDonald's or Burger King (BKW) on price and brand competition. But it viewed itself as "A Cut Above."

From there, after years of underinvestment, the company decided on a program to remodel its stores to better compete with the likes of Panera (PNRA) and Chipotle. But it's not a new idea. McDonald's went through the same change years ago with its U.S.-based restaurants. And it's been successful to the extent that McDonald's is now considering doing the same on a global scale.

To that end, Wendy's recently said that it plans to remodel 20% of its U.S. restaurants by 2015. Out of the 6,500 locations that it has in North America, that means 1,300 stores will get facelifts. That's a pretty aggressive goal, which will require significant capital. The question, though, is how well can Wendy's convince the Street that revitalization efforts can boost traffic and profit margins?

Morgan Stanley doesn't think it can -- at least not at the pace to support a higher valuation. Granted, the company has not shown the innovative prowess of McDonald's. However, fourth-quarter earnings, which beat Street estimates by 1 cent a share, suggest that Wendy's is doing well enough. And although Glass cited stronger competition from McDonald's and Burger King as reason for the downgrade, Wendy's still posted in-line revenue.

Stock quotes in this article: WEN 

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