TAKING STOCK: Wendy's: Good food, bad investment

Dear Mr. Berko:

Please give me your opinion on Wendy's Hamburgers. Our Old Folks Investment Club has been advised to buy 1,900 shares of Wendy's. Our broker believes the stock is underpriced and that it should sell between $10 and $12 in the coming 12 months.

The club members are primarily McDonald's people, so nine of us decided to have lunch at Wendy's. The food was pretty good, but the counter service was terrible. They used only one register, and then the register person had to leave the register and fill the customer's order while all the other people in line had to wait. And worse yet, we had to wait 10 minutes to get a drink refill.

But we were impressed with the building, the food and the prices on the dollar menu. We'd like to know if you think this could be a $10 to $12 stock in a year.

HP, Port Charlotte, Fla.

Dear HP:

I like Wendy's but think someone mixed a few psychedelic mushrooms into your broker's morning egg omelet. And I'd wager my 144-piece Barbie doll collection against a dozen dimes that Wendy's won't hit the $12 mark in the next 12 months. Do not buy it.

Wendy's (WEN-$5), which tries to disguise itself as a fast food restaurant, has some of the most gustable, savory and succulent junk food on the planet. Do you remember the old Camel cigarette billboard advertisement of 60 years ago - "I'd walk a mile for a Frosty''? Well, I would, because that Frosty is delectable and toothsome.

However, WEN's counter service stinks.

Dave Thomas (WEN's founder) and Tom Monaghan, founder of Domino's Pizza, were close friends, and both were elected into the Fast Food Hall of Fame in 1992. As legend goes, Dave and Tom were drinking Buds at a bar in Barbados, celebrating their election to the FFHF, when Tom turned to Dave and said, "If you guys really want to grow revenues, you got to figure out how to deliver meals like we deliver pizza. And you need to do it soon because your food is so good, but your service sucks."

If Dave were alive today and counted the number of minutes a customer stands in line to order a Frosty or a burger, he'd roll over in his grave. This glacial service and its one-register configuration prevents WEN from expanding unit volume like McDonald's or Domino's.

Homeported in loverly Dublin, Ohio, WEN's management lacks the enthusiasm and brio it had in the 1960s, when it expanded unit locations, penetrated the market and created a unique "Where's the beef?" public persona.

WEN is ruined ... I mean, (SET ITAL) run (END ITAL) by takeover goon Nelson Peltz, who tripled debt since the 2008 acquisition, forcing book value to zero and the stock price to tumble. WEN had lackluster growth in early 2000, before Nelson took over. Then, WEN saw miserly improvement after Peltz became CEO and declining revenue in seven of the last dozen years.

WEN's 6,500-unit count has remained relatively flat, with three new units in 2009, 10 new units in 2010 and maybe 20 units in 2012. Still, with $2.5 billion in hamburger revenues, Peltz doesn't know peanuts about fast food marketing, store training, advertising, supervision, food quality, food service or expansion. While WEN eeeeked a few pennies profit last year, it lost the momentum it had when real management was opening a couple hundred stores a year. Peltz seems more interested in WEN's free cash flow and maintaining the status quo.

Annual revenues for 2011 were up 3.9 percent from 2010 due to higher prices and better menu offerings, but margins were lower - a result of higher food, labor and organizational costs. And for the next few years, WEN expects revenues to grow in the low single digits.

While I don't like the stock, I really do like the food.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Wed, Mar 7, 2012

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