Reinstating Sell Rating on Wendy's, Competition and Distractions Weighing on Company

4/14 - "We have removed the NR designation from Wendy’s shares and add it to the Sell list with a 12-month price target of $21 (10% downside). We expect ongoing operational challenges with market share declines (at the hands of MCD & BKC) which, when coupled with cost burdens, should keep ‘core’ margins pressured. We see a low likelihood of a sale (credit environment/eroding fundamentals), and, with nearly a year of uncertainty under the Special Committee, franchisee discontent is growing and initiatives that could have positively driven sales/margins have been slow to develop (remodels, refranchising) prolonging any business turnaround in our view."

"We are lowering our 2008-2010 EPS estimates to $1.25 ($1.30), $1.45 ($1.53) and $1.65 ($1.74), respectively. These changes are the result of more conservative top-line growth assumptions, associated margin deleverage, modest cost saves, delayed refranchising, asset sales and breakfast roll-out. Among QSRs we favor McDonald’s (CL-Buy) and Burger King (Buy), both of which are gaining market share and benefiting from established breakfast businesses, clear marketing messages and international strength. In our view, investors will continue to pay for these attributes that WEN either lacks or is struggling to define."

"Wendy’s shares currently trade at 18.6X our new CY08 EPS vs QSR peers at 16X, a multiple point above McDonald’s and inline with Burger King, suggesting to us a takeout or restructuring premium is still in the stock. We think the former is unlikely and the timing and makeup of the latter is uncertain. Our $21 price target (P/E, DCF) implies 15X CY09 EPS."