Large Hedge Fund Now Owns 6% of This Restaurant Stock

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Murray Stahl’s Horizon Kinetics has reported a position of over 23 million shares in Wendy’s (NASDAQ: WEN), giving it ownership of 6% of the company. Our database of 13F filings shows that the fund only owned 1.3 million shares of the quick service restaurant at the end of the third quarter of 2012, so Stahl and his team have been buying the stock over the last four months (see more stock picks from Horizon Kinetics). Wendy’s has risen 9% year to date after having been down in 2012 against a rising market.

Wendy’s recently surprised the Street by reporting 8 cents per share in earnings for the fourth quarter of 2012 (as opposed to expectations of 4 cents per share). Revenue was also up, though only slightly. While the trailing earnings multiple is still very high, annualizing a figure of 8 cents per share yields a P/E of 16, which is actually fairly reasonable. That would be well above analyst consensus, which currently projects 18 cents per share this year and 20 cents per share in 2014. Those figures imply high multiples for the current year and on a forward basis, but we would expect that targets will be moved up in light of the recent earnings beat. We’d also note that Wendy’s pays a dividend yield of 3.1%, likely not high enough to consider it on pure income terms, but potentially a plus for investors.

Billionaire Nelson Peltz’s Trian Partners is a major shareholder in Wendy’s, with 83 million shares in its portfolio at the end of September. This made Wendy’s one of the activist hedge fund’s five largest positions by market value (find more of Peltz's favorite stocks). Southeastern Asset Management slightly increased its stake to close to 35 million shares; that fund is managed by Mason Hawkins. D.E. Shaw, a large hedge fund managed by billionaire David Shaw, was also buying Wendy’s during the third quarter (check out more stocks D.E. Shaw was buying).

We would consider McDonalds (NYSE: MCD) and Burger King (NYSE: BKW) to be the two closest peers for Wendy’s. McDonalds has only been able to eke out modest growth rates in revenue and earnings compared to a year ago, and even with its strong brand name and defensive attributes (a beta of 0.3, and a dividend yield above 3%), we’re not sure it’s an attractive buy at 18 times trailing earnings. Burger King is up 20% from its levels shortly after its June IPO; it currently trades at 25 times consensus for 2013. We would avoid that stock for now as its valuation depends on high growth of the business.

Wendy’s can also be compared to Jack in the Box (NASDAQ: JACK) and Yum! Brands (NYSE: YUM). Trailing earnings multiples at these two quick service restaurants are in the 20 range, though Wall Street analysts expect high growth at Jack in the Box. That company may be worth watching, but as with Burger King we would hesitate to buy at this time. Yum is currently struggling with demand in China, where the company earns a substantial portion of its revenue and income; since it is so macro dependent, interested investors would have to look closely at that country in order to evaluate an investment in Yum. Several of these peers made our list of the most popular restaurant stocks among hedge funds in the third quarter of 2012 (See hedge funds' favorite restaurant stocks). We’d note that the market is generally valuing quick service restaurants much higher than their table service cousins: Darden Restaurants, for example, currently carries a trailing P/E of 13. Value investors therefore may want to look at the table service restaurants as opposed to Wendy’s and other companies in the quick service segment.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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