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We upgrade our recommendation on The Wendy’s Co. (WEN - Analyst Report) from Neutral to Outperform based on decent first-quarter 2013 results reported earlier this month and increased earnings guidance despite volatility in the US quick-service restaurant industry.

Why the Upgrade?

On May 8, Wendy’s posted decent first quarter results and also increased its bottom line expectation for 2013. Even amid a volatile US quick-service restaurant industry marked by faltering consumer confidence and heightened competition, Wendy’s expects to record increased year-over-year profitability in each of the first three quarters of 2013, buoyed by sales leverage and cost saving initiatives.

In its recently-concluded first-quarter 2013, Wendy's reported adjusted earnings of 3 cents per share, beating the Zacks Consensus Estimate as well as the year-ago earnings by a penny. Earnings in the quarter received a boost from top-line growth and margin expansion at the company-operated restaurants. The company’s ‘Right Price, Right Size Menu’ initiative also pushed up earnings during the quarter. Wendy’s continues to gain market share, driven by price value proposition and premium limited period offerings.

The company also raised its earnings per share guidance to reflect net cost savings from debt refinancing. Its adjusted earnings per share are now expected to be within the range of 20–22 cents per share, up from the prior expectation of 18–20 cents per share. The revised adjusted earnings per share range represents an estimated year-over-year increase of 18%–29%.

Basically, the company is in a transition mode since the sale of its counterpart Arby’s brand in 2011. Management expects to incur lower overhead expenses as it will only have to support a single brand. Going forward, several of its growth initiatives like elimination of unprofitable operations, restaurant reimaging, and expansion in domestic and overseas markets should bode well for Wendy’s.

The Wendy’s currently carries a Zacks Rank #2 (Buy). Some players in the same industry, which look attractive at current levels, include Domino's Pizza Inc.  (DPZ - Analyst Report), The Cheesecake Factory Inc (CAKE - Analyst Report) and Burger King Worldwide Inc. (BKW - Analyst Report) all carrying a Zacks Rank #2.
 

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