Wendy's/Arby's (WEN) Could Be Enticing To Investors

June 29, 2009 10:06 AM EDT

This weekend's Barron's had an article highlighting Wendy's/Arby's (NYSE: WEN) and said that although its stock price has suffered the past few months, it still could look appetizing to investors.

However, Barron's does mention some things that are likely dragging on the stock. WEN has slid more than 30%, to around $3.70.

• Sales have been declining at Arby's.
  
• The company won't specify how it will use most of the proceeds from a recent $565 million bond offering.
  
• A recent agreement under which Wendy's/Arby's will pay Trian a quarterly $250,000 fee for Trian's advice on acquisitions, financing, investment banking and initiatives to increase shareholder value. Wendy's/Arby's also will pay Trian a $900,000 fee to assist in selling noncore assets, with a bonus if proceeds exceed expectations. In addition, Wendy's/Arby's invested $75 million with Trian. WEN plans to take out its money before 2010 and will pay Trian a $5.5 million withdrawal fee. These arrangements make some analysts fear Peltz and May are using Wendy's/Arby's as a cash cow.

Peltz and May respond to why the debt offering is important because there philosophy is that when money is available, you take it, and take the risk out of your balance sheet.

Peltz, who with his partner Peter May owns 22% of the shares, argues that "this is a phenomenal company that is truly misunderstood and was mismanaged for years."

Peltz feels that Wendy's/Arby's should trade at a multiple close to twice what it is trading at now. If investors put a 9 multiple on 2011 Ebitda, Wendy's would be valued at $5 billion. After subtracting $1 billion of net debt and dividing by 470 million shares outstanding, the stock theoretically would be worth $8.50. That is a big if. But even a multiple of seven would translate into a $6 stock.

Both Nelson Peltz and Peter May, both Wendy's/Arby's directors, doubled down on their bet late last year, spending $205 million for 49.4 million shares at $4.15.

Arby's is looking at increasing its store count from 3,500 stores to 5,000, and even Wendy's, with 6,000 stores in the U.S., could add 1,000 without seeing sales cannibalized.

May did note that Wendy's does have an often-overlooked asset--it owns 700 stores without encumbrances. Since land for new stores costs $750,000 to $1 million, the property might be worth more than $1 a share. Back that out, and Wendy's stock is only valued around $2.70 and should be poised for a rebound.

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• Nelson Peltz
• Trian Fund
• Barron's

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