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Wendy's (WEN) Upgraded to Buy: Is it Part of Your Portfolio?

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On Sep 27, Zacks Investment Research upgraded the quick-service restaurant chain The Wendy’s Company (WEN - Free Report) by a notch to a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Wendy’s is the world’s third largest quick-service hamburger company. The Wendy’s system includes more than 6,500 franchise and company-owned restaurants across the U.S. and 29 other countries.

The company’s international business is poised to be a growth driver in the long term. It has growth plans and partnerships in Argentina, Phillippines and Japan, and is in long-term development agreements with franchisees across many countries in the Middle East, North Africa, Russia, to name a few.

This is in keeping with the international expansion strategies followed by other restaurant industry giants like Yum! Brands, Inc. (YUM - Free Report) , McDonalds Corporation (MCD - Free Report) and Papa John’s International, Inc. (PZZA - Free Report) .

In this regard, in Jun 2016, Wendy’s Japanese franchisee – Wendy's Japan – acquired the First Kitchen brand with the intention to convert all 136 locations into hybrid Wendy's First Kitchen restaurants.

Meanwhile, as part of its brand transformation program, the company undertook a system optimization initiative in Jul 2013, to change its business to a franchisee-based model. We believe franchising a large chunk of its system will lower Wendy’s general and administrative expenses and thereby boost earnings. Moreover, over the long-term, it would generate a higher return on equity by lowering capital requirements.

Moreover, Wendy’s sales initiatives like menu innovation and promotional offerings are driving growth. Also, increased investments in technology should quicken service and thus, result in increased customer count. Notably, reimaging of its restaurants is also expected to increase traffic and drive higher sales.

However, rising costs, incremental capital spending on re-imaging program, macroeconomic concerns, along with near-term pressure on comps remain potent headwinds.

WENDYS CO/THE Price and Consensus

Meanwhile, the company reported strong second-quarter 2016, results on Aug 10, wherein both the top and bottom lines beat the Zacks Consensus Estimate.

In fact, the second quarter marked Wendy’s 14th consecutive quarter for positive comps. Moreover, earnings have surpassed the Zacks Consensus Estimate in all of the four trailing quarters, with an average beat of 29.01%.

Backed by the positive second quarter results, the company raised its guidance for profit and earnings per share for 2016. It expects EPS to be in the range of 39–40 cents, up from its previous guidance range of 38–40 cents. EBITDA margin is expected to be in the range of 38–40%, higher than the previous target of 35%.

Also, upward estimate revisions reflect optimism regarding the stock’s prospects. The Zacks Consensus Estimate for 2016 and 2017 earnings has moved north by 2.3% and 2.4%, respectively, over the last 60 days.

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