Walking Away From a Wendy's Love Affair

NEW YORK ( TheStreet) -- As investors, it's somewhat natural to want to periodically revisit the companies you've given up on and sold. Those of us who are of the "value" persuasion tend to hold onto positions longer than others, as it can take years for a thesis to play out.

When I give up on a name, it's usually not a quick decision, but since I've invested so much time, I may continue to follow companies long after I've sold. That can be painful, especially when you were too hasty in selling, but you can also learn a great deal.

I admit I still watch Wendy's ( WEN), (and occasionally visit the drive-through window as well). After a three-year holding period, and modest profit, I gave up on the stock early last summer. The company appeared to have all the building blocks in place following the 2009 merger with Arby's: well-known high-quality brand, cost-cutting opportunities, new products, legendary investor Nelson Peltz as chairman and a formidable portfolio of owned real estate.

Unfortunately, while the Wendy's brand held its own through the recession, Arby's same-store sales tanked. Meanwhile the new product launches resulted in very little, if any traction. The hope that breakfast would send the company to new heights never materialized.

The rumors of suitors interested in taking over the company never bore fruit. While the company was turning a profit, it was a very small one at that; as still evidenced by the current 637.5 price-to-earnings ratio.

Along the way, Wendy's several times appeared to be on the cusp of turning the corner. New management was brought in; the company finally parted ways with Arby's by selling most its stake. There were new advertising campaigns, but none that recaptured the brilliance of the 1980's "Where's the Beef" ads, or those that featured company founder Dave Thomas.

Thomas had stepped in to that role after retirement, and many believe it helped save the company. While his daughter Wendy was brought back in for some commercials, it would be difficult for anyone to have the impact that Dave Thomas had.

The sweetener for me as an investor was the fact that the company owns a lot of real estate. As of the latest year-end, that included 643 locations with the land and building and 487 building only. That was, and still is a formidable portfolio of real estate. But with real estate still suffering, and no efforts to monetize the potential value, its impact is less meaningful at this point, anyway. The real estate assets may have at least helped to put a floor price in the stock.

The end result is that Wendy's has essentially traded sideways since 2009, between $4 and $5.50, with the occasional dip and minor rebound.

Admittedly, the company's latest quarterly results, reported last month, were good. While revenue ($630 million) was slightly below consensus ($637.8 million), earnings per share came in at double the 4 cents consensus estimate. Company guidance for 2013 is calling for eps in the 18 cents to 20 cents range, putting the forward price earnings ratio in the mid to high 20's. That's not stellar, but a huge improvement, if realized.

Whether Wendy's is finally making real progress or not remains to be seen. In the restaurant sector in general, I'm worried about the specter of rising commodity costs and potential inability to pass those on to the consumer. Wendy's CEO Emil Brolick, however, is not worried about costs. Following Wendy's latest quarterly release, Brolick suggested that the company expects cost to rise between 90 and 120 bps, which is already factored into the company's outlook.

Could I have pulled the trigger too soon on Wendy's? It would not be the first time.

Time will tell.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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