NEW YORK (TheStreet) – Whatever you may think about fast-food giant Wendy's (WEN) offerings, its stock has been anything but appetizing.

Shares are currently trading at around $8 per share and are down nearly 7% for the year to date, trailing  McDonald's (MCD) and Yum! Brands (YUM), which have lost 4% and 8%, respectively, during the same span.

Outside of Chipotle Mexican Grill (CMG) there are very few restaurant stocks worth owning these days. Weak same-store sales and declining foot traffic continue to weigh down the sector.

In the case of Wendy's, which reported earnings earlier Thursday, management is looking for ways to create shareholder value while reducing exposure and risk.

During the conference call, Emil Brolick, Wendy's CEO, said the company plans to sell all of its company-owned stores (135 locations) in Canada to franchisees. Brolick sees this as a way to reduce operating expenses and increase the company's cash flow.

While it's not yet reflected in the stock price, Brolick has done a good job of getting Wendy's back on its feet. My problem, however, is that Wendy's has been in this perpetual restructuring mode for some time.

Despite the stock's year-to-date underperformance, the shares, which are trading at a P/E of 36, are still not cheap. While this matches the valuation of rival Burger King (BKW), Wendy's is trading at a P/E that is 19 points and 9 points higher than McDonald's and Yum!, respectively. I worry investors looking for value may buy too soon. Not to mention, the results of selling its company-owned stores may not be realized as expected.

Also, even if Wendy's cash flow and operating expenses do improve as Brolick suggests, there is no guarantee that Wendy's will ever outperform. Consider, both McDonald's and Yum! have had their struggles over the past couple of quarters with declining traffic. There has been no evidence that this traffic has detoured to Wendy's.

But I don't expect McDonald's and Yum! to remain dormant forever. At some point, they will rebound. So if Wendy's is not able to capitalize on the sector's weakness, when will it happen?

The way I see it, it's going to cost money to win this food fight, not cutting expenses. Chipotle is certainly not going away. Its going to require more capital investments by Wendy's to boost traffic and grow profit margins.

Wendy's must continue its push towards premium foods to separate itself from McDonald's and Yum! It won't ever beat them on price. Chipotle didn't care. It carved out a niche and customers have responded.

In the meantime, I can't recommend these shares. I don't yet see the investment value. The Wendy's burger is far more appetizing.

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


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates WENDY'S CO as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate WENDY'S CO (WEN) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, compelling growth in net income, reasonable valuation levels and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • WENDY'S CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, WENDY'S CO increased its bottom line by earning $0.12 versus $0.02 in the prior year. This year, the market expects an improvement in earnings ($0.35 versus $0.12).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 2070.8% when compared to the same quarter one year prior, rising from $2.13 million to $46.30 million.
  • WEN, with its decline in revenue, slightly underperformed the industry average of 5.9%. Since the same quarter one year prior, revenues fell by 13.3%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

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