Image via WikipediaBOSTON (TheStreet) -- Restaurant company Wendy's/Arby's Group(WEN) gets no love from investors, but the company delivered solid quarterly numbers, exceeding analysts' earnings forecast by 25% and matching their sales estimates.More on WENValue ETFs Rise Amid Market WeaknessCramer: It's Really, Really Ugly Out ThereNews You Need
Wendy's stock has fallen 25% from a 52-week high on April 26, but considering the volatility of stocks in recent weeks, Wendy's/Arby's Group appears to be a comparatively safe investment at its current price.
The company's second-quarter net income dropped 28% to $11 million, but earnings per share remained steady at 3 cents. The gross margin hovered at 25%, but the operating margin extended from 7.5% to 8.6%. Wendy's comparable store sales declined 1.7% while Arby's registered a drop of 7.4%. However, revenue fell just 3.9% to $877 million. Operating profit was boosted by a 3.9% decrease in the cost of sales and a 14% drop in general and administrative expenses. Although respective business performance was lackluster, there is reason for optimism.
Wendy's has ambitious international expansion plans. Since Wendy's and Arby's merged in 2008, they have opened up 45 restaurants outside of North America. And management has signed development agreements for 400 new international locations over the next 10 years. Franchise sales comprised just 12% of quarterly sales, so the international franchise arena is a preferred growth venue. The balance sheet stores $508 million of cash, equaling a quick ratio of 1.4, and $1.6 billion of debt, converting to a debt-to-equity ratio of 0.7.
Wendy's stock has dropped 36% a year, on average, since 2007. In 2010, it has fallen 11%, more than the S&P 500, which is down 4%. Wendy's is a pricey stock. It commands a forward earnings multiple of 23, on par with other restaurants, but higher than the S&P 500 average. But its book value multiple of 0.8, sales multiple of 0.5 and cash flow multiple of 7 reflect discounts of 86%, 81% and 43% to restaurant averages.
Quarterly return on assets widened to 0.2% and return on equity rose to 0.3%, lagging the industry average of 27%. Both measures were negative in the year-earlier quarter.
Analysts' opinions of the company vary. Six, or 38%, advise purchasing its shares, nine recommend holding and one advocates selling them. A median target of $5.18 suggests a potential return of 25%. CL King expects the stock to gain 68% to $7. Oppenheimer predicts a rise of 27% to $5.30. Deutsche Bank(DB) projects a climb of 26% to $5.25.
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