Thursday, April 26, 2007

Wendy's (NYSE:WEN): Not much upside left

JP Morgan has some interesting comments on Wendy's (NYSE:WEN) after the co released its Q1 results and said it would explore strategic alternatives. Wendy's said it is considering "changes to its capital structure, a possible sale, merger, or other business combination".

JPM's John Ivankoe notes that the earnings release was an interesting juxtaposition to Triarc's April 20 press release which said "Arby's (owned by Triarc) will be able to significantly increase value through both organic growth and the acquisition of other restaurant companies." The firm finds this relevant as the Chairman and CEO of Triarc Nelson Peltz controls Trian Fund Management which owns 8.3% of WEN common stock.

Interestingly, the Wendy's tax-free spin off of Tim Hortons only allows another 4m out of the current 89m shares to be bought back between now and September 2008. Only Triarc stands out as a possible business combination, and therefore they believe a leveraged recap makes the most sense to analyze in a limited amount of time.

If WEN were to increase leverage to pay a special dividend (like QSR peer DPZ), the firm would estimate the stock to be worth between $31- $37 if a 17-25x multiple were assigned to proforma F08 earnings. At this multiple range, EV/EBITDA ranges from 8.6x-10x, near its QSR peers which trade from 9.4x-9.8x. Firm remains UW and recommends investors take advantage of likely significant stock strength to sell shares.

Notablecalls: Does the news mean the management is giving up on the turnaround? After all the restructuring they have done, did they realize it's not going to work after all? Given the high valuation (the stock traded as high as $37.50 in after hours action), there isn't much upside left even in case of private equity players stepping in.

I suspect that if you can get a fill around $37.50 early on, you'll make money shorting today. Tight stop, say $0.50 looks prudent here.

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