Wendy's May Be the Next Big Turnaround Story
I pointed out that I am long Nokia
In this article, I consider another stock from the sub-$5 world: Wendy's
Investors love turnarounds. They just do not like sitting around waiting for them to happen. As such, I could see WEN spiking on strong sales or further stumbles by rival (and now No. 3) Burger King. Until the company shows that it's multi-year turnaround plan is starting to show material results, I do not expect the stock to be able to sustain upside.
In some ways, Wendy's is attempting to do what Domino's
While Wendy's has not been as self-deprecating as Domino's, it has, for all intents and purposes, admitted errors in its ways. Its menu has undergone wholesale changes, its burgers are no longer square and, slowly but surely, the company is remodeling its stores. A makeover process of that scale takes time, whereas Domino's did not have to worry about overhauling brick-and-mortar stores.
In 2011, Wendy's remodeled 10 stores under its "Image Activation" program. It expects to overhaul about 50 more in 2012, which will lead to higher capital expenditures that CEO Emil Brolick expects to level off over time:
In 2013 and beyond, we expect to generate further economies of scale and reduce unit investment, with the goal of more rapidly reimaging a significant portion of the Wendy's system. All our customers deserve the kind of Wendy's experience that has been created in our new Image Activation restaurants. It's a relatively slow process, but likely a worthwhile one.
When you compare shares of DPZ and WEN, you see similarities. Both companies fell on hard times and their respective stocks stagnated. Domino's successfully turned the corner and the stock followed. Wendy's has yet to fully enter that crucial pivot point, but it could be headed that way.
As a long-term investor, there's really nothing better than accumulating a stock like WEN (or DPZ about two to three years ago) during this period of stagnation. While there's considerable risk associated with the play, the dividend decreases your exposure slightly. Plus, if you're scaling in somewhat conservatively over time, you're not hampering your personal cash flow. Accumulating over a period of years can lead to a formidable position, but it's not nearly the same as going all-in the day before earnings.
If you believe in the narrative that Wendy's is crafting and have faith in management to execute (Brolick headed up Taco Bell as it built and rebuilt its brand and market share), this might be an excellent time to consider putting together a position while the company and stock fly under the radar.