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FEU– ALABANG Lot 1, Corporate Woods Avenue corner South Corporate Avenue Woods District, Filinvest City, Alabang, Muntinlupa City
STATEMENT OF FINANCIAL POSITION
Wendy’s International, Incorporated
Submitted to: Sir. Eliezer Gonzales Submitted by: Shekinah Ruth L. Tena
January 2019
BRIEF SUMMARY Wendy's began on November 15, 1969, when the company's founder, Dave Thomas, opened his first restaurant. It was located at 257 East Broad Street, in Columbus, Ohio. Thomas chose the name Wendy's in honor of his daughter. He wanted to provide his customers with fast, hearty food, in a family setting. One year later, Thomas opened a second restaurant, also in Columbus. This eatery had the first modern drive-thru window among fast food restaurants. Wendy's grew quickly after the opening of this second restaurant. By 1976, Wendy's had opened or franchised five hundred restaurants, including some in Canada. Two years later, the company had topped one thousand restaurants, and by 1979, the firm operated more than 1,500 eateries, including some in Mexico. Also in 1979, Wendy's was the first fast food restaurant to introduce a salad bar. The company continued to add approximately five hundred restaurants each year during the early 1980s. During the 1990s, Wendy's continued to expand, operating over six thousand Wendy's restaurants by 2001. In 1996, the company purchased Tim Horton's. Expanding its holdings even further, in 2002, the firm purchased Baja Fresh Mexican Grill. In 2001, the company also became the sponsor of a Ladies Professional Golf Association tournament in Columbus, Ohio. The firm's growth was partly due to its creative advertising. In 1984, the company introduced its "Where's the Beef" campaign, which made fun of other restaurants' hamburgers. This phrase became a catchphrase for Americans during the mid 1980s. Dave Thomas also starred in most of Wendy's commercials from the late 1980s until his death in 2002. Customers identified with Thomas and his pledge to provide them with high-quality food. The Wendy's Company Reports First Quarter 2018 Results North America same-restaurant sales increase 1.6% in 1Q 21st consecutive quarter of positive same-restaurant sales 33 global restaurant openings during first quarter of 2018
NEWS PROVIDED BY The Wendy's Company May 08, 2018, 04:05 ET
2018 RATIO ANALYSIS
Valuation P/E Current P/E Ratio (with extraordinary items) P/E Ratio (without extraordinary items) Price to Sales Ratio Price to Book Ratio Price to Cash Flow Ratio Enterprise Value to EBITDA Enterprise Value to Sales Total Debt to Enterprise Value
21.36 6.7 21.35 3.39 6.89 16.47 15.41 4.25 0.42
Profitability Gross Margin
40.66
Operating Margin
23.61
Pretax Margin
8.26
Net Margin
15.86
Return on Assets
4.67
Return on Equity
35.25
Return on Total Capital
9.07
Return on Invested Capital
6.15
Efficiency Revenue/Employee
101,108.00
Income Per Employee
16,035.00
Receivables Turnover
11.48
Total Assets Turnover
0.29
Liquidity
Current Ration
1.78
Quick Ratio
1.77
Cash Ratio
1.17
2017 RATIO ANALYSIS Current Valuation
WEN WEN
Industry Avg
S&P 500
WEN 5Y Avg*
Price/Earnings
6.9
21.9
17.2
35.1
Price/Book
5.0
62.7
2.9
4.6
Price/Sales
2.8
2.8
1.9
2.2
12.9
12.8
11.7
16.8
2.0
1.9
2.2
2.0
.
Price/Cash Flow Dividend Yield %
Profitability 2017-12
Tax Rate % Net Margin %
— 15.86
Asset Turnover (Average)
0.30
Return on Assets %
4.83
Financial Leverage (Average)
7.15
Return on Equity %
35.25
Return on Invested Capital %
13.22
Interest Coverage
1.86
Liquidity
Current Ratio
1.78
Quick Ratio
1.26
Financial Leverage
7.15
Debt/Equity
4.75
Efficiency
2016-12
Days Sales Outstanding
26.17
Days Inventory
1.60
Payables Period
18.27
Cash Conversion Cycle Receivables Turnover Inventory Turnover
9.52 13.95 226.85
Fixed Assets Turnover
1.19
Asset Turnover
0.36
2016 RATIO ANALYSIS
Valuation P/E Ratio (TTM) P/E Ratio (includingextraordinaryitems) Price to Sales Ratio Price to Book Ratio
18.57 6.7 3.39 6.89
Price to Cash Flow Ratio
16.47
Enterprise Value to EBITDA Enterprise Value to Sales
15.41 4.25
Total Debt to Enterprise Value Total Debt to EBITDA EPS (recurring)
0.42 6.66 0.84
EPS (basic) EPS (diluted)
0.79 0.77
Profitability
2016-12
Tax Rate %
35.73
Net Margin %
9.03
Asset Turnover (Average)
0.36
Return on Assets %
3.22
Financial Leverage (Average)
7.46
Return on Equity %
20.24
Return on Invested Capital %
6.54
Interest Coverage
2.76
Efficiency
2016-12
Days Sales Outstanding
26.17
Days Inventory
1.60
Payables Period
18.27
Cash Conversion Cycle Receivables Turnover Inventory Turnover
9.52 13.95 226.85
Fixed Assets Turnover
1.19
Asset Turnover
0.36
Liquidity
Current Ratio
1.97
Quick Ratio
1.29
Financial Leverage
7.46
Debt/Equity
4.71
ANALYSIS Wendy's financials are improving as a result of the firm's refranchising model. This doesn't necessarily make Wendy's a good investment, since its stock is currently overvalued by the market. WEN's financials have been highly volatile in the last 3years. Current firm’s business strategy seeks for higher and more stable earnings and cash flows. Wendy's operating margins have highly increased from the last 3 years. This is an outcome of high cost cutback, because of the firm's implemented optimization system. Operating expenses and labor costs are being transferred to franchise's acquirers, increasing firm's savings and financial results. As a matter of fact, net margin has also increased in the current years, behavior that evidences firm's higher net incomes. It is true that total revenues have decreased, but same-restaurant-sales growth has had a positive trend in the last 4 years. This is a very important metric to analyze since it's what really measures store's sales progress. It is important to notice how Wendy's refranchising strategy, although showing an important total revenue decrease, is currently improving EBIT's growth. Wendy's had a 1% fundamental growth in 2016. Investments are being efficient if we take into account that current ROIC is considerably higher when compared to the firm's cost of capital. This means that the firm is currently earning low but important exceed returns after paying its cost of borrowing and earning its investment returns. Return on Equity has also increased % in the last current years. The firm has known how to reach high levels of profitability with stockholder's investments. It is a fact that one of the firm's goals is to keep reducing CAPEX (Capital Expenditures) and therefore reinvestment. This means that there is more available money to pay stockholders, although the firm is currently paying dangerous amounts. The firm is currently paying stockholders 5x times what it can afford. Nevertheless, total cash remains solid and current indebtedness has curiously remained healthy. Wendy's has also shown strong levels of liquidity, with a 2016's current ratio of 1.97 and last current years ratios all above 1. Operating margins will tend to increase in the following 10 years thanks to cost savings and more revenue quality. We used the effective tax (36%) in the base year, considering that it was what the firm really paid. This tax rate will move towards the marginal tax rate (40%) in the terminal year. Wendy's cost of capital was computed with a 51% equity and 49% debt capital structure, a beta reflecting the risk of its only business (Restaurants) and an equity risk premium based on the firm's local and international revenues. As a result, we arrived to a 7.85% cost of equity, 2.04% cost of debt and 5.01% cost of capital. Cost of capital will slightly decrease as the company reaches higher levels of maturity. Firm's risk will remain low since revenues will keep emerging mostly from North America.
Wendy's current growth is being efficient if we consider that current return on invested capital is higher than the firm's cost of capital. Reinvestment rate has been very volatile in the last 5 years, though it's not a robust decision to use current rate as a base for projections. We assumed that a fair reinvestment rate for Wendy's would be a number close to industry's average (3% higher, ~25%). This reinvestment rate will decrease as capital expenses continue to be reduced in the next years. Return on invested capital will slightly increase, although it will not present a significant growth. In the terminal year, the firm is expected to earn important exceed returns of 1.5% (4% cost of capital vs. 5.50% ROIC).
After arriving to an operating asset's value of $7,436,578.03, we added current firm's cash and marketable securities, subtracted current market value of debt and the value of the firm's outstanding options, which is an expected expense for the company. Then, we sensitized the DCF model to increase our confidence in the made assumptions. We used exceed returns as the main variable for the sensibility analysis. Thus, we decided that the firm's worst case is to earn no exceed returns and destroy value (ROIC < cost of capital). For an optimistic scenario, we decided to let the company earn 2% of exceed returns in perpetuity (which is high due to the assumption of full matureness in the company's life cycle). The DCF valuation generated a range value from $8.45 to $15.24 per share. The base scenario for the value of the stock is $14.01 per share.
Recommendation This ratio proposal proved that firm's system or the Wendy’s International, Inc optimization is reducing total revenues but increasing margins. The firm will continue to invest in growth, opening more stores. Royalties and rental income will gain share in revenues. CAPEX is expected to slightly decrease as reinvestment needs diminish. High payout ratios will persist for some years and FCFE will start to grow and stabilize. The firm is paying stockholders more than what it can afford. However, this does not affect firm's debt profile. Indicators show firm's good debt repayment capacity in the short and long term. In the past years, stock's price growth and high payout ratios have made Wendy’s International, Incorporated a good company to invest in.
Ref: https://www.referenceforbusiness.com/history2/31/Wendy-s-International-Inc.html http://www.ohiohistorycentral.org/w/Wendy%27s https://quotes.wsj.com/WEN/financials https://www.prnewswire.com/news-releases/the-wendys-company-reports-first-quarter-2018results-300644658.html file:///C:/Users/ACER/Downloads/Annual%20Report%202017_web.PDF https://seekingalpha.com/article/4082992-wendys-company-improving-financials-overvaluedstock https://seekingalpha.com/filing/3757088 https://accountingexplained.com/financial/ratios/?fbclid=IwAR0dSnEylc6NhGyteESqkF_gVxZ4pc HCJw2-VI7Lw8-dHL4t-DT2Q2xqdis
STATEMENT OF FINANCIAL POSITION
Wendy’s International, Incorporated
Submitted to: Sir. Eliezer Gonzales Submitted by: Shekinah Ruth L. Tena
January 2019
BRIEF SUMMARY Wendy's began on November 15, 1969, when the company's founder, Dave Thomas, opened his first restaurant. It was located at 257 East Broad Street, in Columbus, Ohio. Thomas chose the name Wendy's in honor of his daughter. He wanted to provide his customers with fast, hearty food, in a family setting. One year later, Thomas opened a second restaurant, also in Columbus. This eatery had the first modern drive-thru window among fast food restaurants. Wendy's grew quickly after the opening of this second restaurant. By 1976, Wendy's had opened or franchised five hundred restaurants, including some in Canada. Two years later, the company had topped one thousand restaurants, and by 1979, the firm operated more than 1,500 eateries, including some in Mexico. Also in 1979, Wendy's was the first fast food restaurant to introduce a salad bar. The company continued to add approximately five hundred restaurants each year during the early 1980s. During the 1990s, Wendy's continued to expand, operating over six thousand Wendy's restaurants by 2001. In 1996, the company purchased Tim Horton's. Expanding its holdings even further, in 2002, the firm purchased Baja Fresh Mexican Grill. In 2001, the company also became the sponsor of a Ladies Professional Golf Association tournament in Columbus, Ohio. The firm's growth was partly due to its creative advertising. In 1984, the company introduced its "Where's the Beef" campaign, which made fun of other restaurants' hamburgers. This phrase became a catchphrase for Americans during the mid 1980s. Dave Thomas also starred in most of Wendy's commercials from the late 1980s until his death in 2002. Customers identified with Thomas and his pledge to provide them with high-quality food. The Wendy's Company Reports First Quarter 2018 Results North America same-restaurant sales increase 1.6% in 1Q 21st consecutive quarter of positive same-restaurant sales 33 global restaurant openings during first quarter of 2018
NEWS PROVIDED BY The Wendy's Company May 08, 2018, 04:05 ET
2018 RATIO ANALYSIS
Valuation P/E Current P/E Ratio (with extraordinary items) P/E Ratio (without extraordinary items) Price to Sales Ratio Price to Book Ratio Price to Cash Flow Ratio Enterprise Value to EBITDA Enterprise Value to Sales Total Debt to Enterprise Value
21.36 6.7 21.35 3.39 6.89 16.47 15.41 4.25 0.42
Profitability Gross Margin
40.66
Operating Margin
23.61
Pretax Margin
8.26
Net Margin
15.86
Return on Assets
4.67
Return on Equity
35.25
Return on Total Capital
9.07
Return on Invested Capital
6.15
Efficiency Revenue/Employee
101,108.00
Income Per Employee
16,035.00
Receivables Turnover
11.48
Total Assets Turnover
0.29
Liquidity
Current Ration
1.78
Quick Ratio
1.77
Cash Ratio
1.17
2017 RATIO ANALYSIS Current Valuation
WEN WEN
Industry Avg
S&P 500
WEN 5Y Avg*
Price/Earnings
6.9
21.9
17.2
35.1
Price/Book
5.0
62.7
2.9
4.6
Price/Sales
2.8
2.8
1.9
2.2
12.9
12.8
11.7
16.8
2.0
1.9
2.2
2.0
.
Price/Cash Flow Dividend Yield %
Profitability 2017-12
Tax Rate % Net Margin %
— 15.86
Asset Turnover (Average)
0.30
Return on Assets %
4.83
Financial Leverage (Average)
7.15
Return on Equity %
35.25
Return on Invested Capital %
13.22
Interest Coverage
1.86
Liquidity
Current Ratio
1.78
Quick Ratio
1.26
Financial Leverage
7.15
Debt/Equity
4.75
Efficiency
2016-12
Days Sales Outstanding
26.17
Days Inventory
1.60
Payables Period
18.27
Cash Conversion Cycle Receivables Turnover Inventory Turnover
9.52 13.95 226.85
Fixed Assets Turnover
1.19
Asset Turnover
0.36
2016 RATIO ANALYSIS
Valuation P/E Ratio (TTM) P/E Ratio (includingextraordinaryitems) Price to Sales Ratio Price to Book Ratio
18.57 6.7 3.39 6.89
Price to Cash Flow Ratio
16.47
Enterprise Value to EBITDA Enterprise Value to Sales
15.41 4.25
Total Debt to Enterprise Value Total Debt to EBITDA EPS (recurring)
0.42 6.66 0.84
EPS (basic) EPS (diluted)
0.79 0.77
Profitability
2016-12
Tax Rate %
35.73
Net Margin %
9.03
Asset Turnover (Average)
0.36
Return on Assets %
3.22
Financial Leverage (Average)
7.46
Return on Equity %
20.24
Return on Invested Capital %
6.54
Interest Coverage
2.76
Efficiency
2016-12
Days Sales Outstanding
26.17
Days Inventory
1.60
Payables Period
18.27
Cash Conversion Cycle Receivables Turnover Inventory Turnover
9.52 13.95 226.85
Fixed Assets Turnover
1.19
Asset Turnover
0.36
Liquidity
Current Ratio
1.97
Quick Ratio
1.29
Financial Leverage
7.46
Debt/Equity
4.71
ANALYSIS Wendy's financials are improving as a result of the firm's refranchising model. This doesn't necessarily make Wendy's a good investment, since its stock is currently overvalued by the market. WEN's financials have been highly volatile in the last 3years. Current firm’s business strategy seeks for higher and more stable earnings and cash flows. Wendy's operating margins have highly increased from the last 3 years. This is an outcome of high cost cutback, because of the firm's implemented optimization system. Operating expenses and labor costs are being transferred to franchise's acquirers, increasing firm's savings and financial results. As a matter of fact, net margin has also increased in the current years, behavior that evidences firm's higher net incomes. It is true that total revenues have decreased, but same-restaurant-sales growth has had a positive trend in the last 4 years. This is a very important metric to analyze since it's what really measures store's sales progress. It is important to notice how Wendy's refranchising strategy, although showing an important total revenue decrease, is currently improving EBIT's growth. Wendy's had a 1% fundamental growth in 2016. Investments are being efficient if we take into account that current ROIC is considerably higher when compared to the firm's cost of capital. This means that the firm is currently earning low but important exceed returns after paying its cost of borrowing and earning its investment returns. Return on Equity has also increased % in the last current years. The firm has known how to reach high levels of profitability with stockholder's investments. It is a fact that one of the firm's goals is to keep reducing CAPEX (Capital Expenditures) and therefore reinvestment. This means that there is more available money to pay stockholders, although the firm is currently paying dangerous amounts. The firm is currently paying stockholders 5x times what it can afford. Nevertheless, total cash remains solid and current indebtedness has curiously remained healthy. Wendy's has also shown strong levels of liquidity, with a 2016's current ratio of 1.97 and last current years ratios all above 1. Operating margins will tend to increase in the following 10 years thanks to cost savings and more revenue quality. We used the effective tax (36%) in the base year, considering that it was what the firm really paid. This tax rate will move towards the marginal tax rate (40%) in the terminal year. Wendy's cost of capital was computed with a 51% equity and 49% debt capital structure, a beta reflecting the risk of its only business (Restaurants) and an equity risk premium based on the firm's local and international revenues. As a result, we arrived to a 7.85% cost of equity, 2.04% cost of debt and 5.01% cost of capital. Cost of capital will slightly decrease as the company reaches higher levels of maturity. Firm's risk will remain low since revenues will keep emerging mostly from North America.
Wendy's current growth is being efficient if we consider that current return on invested capital is higher than the firm's cost of capital. Reinvestment rate has been very volatile in the last 5 years, though it's not a robust decision to use current rate as a base for projections. We assumed that a fair reinvestment rate for Wendy's would be a number close to industry's average (3% higher, ~25%). This reinvestment rate will decrease as capital expenses continue to be reduced in the next years. Return on invested capital will slightly increase, although it will not present a significant growth. In the terminal year, the firm is expected to earn important exceed returns of 1.5% (4% cost of capital vs. 5.50% ROIC).
After arriving to an operating asset's value of $7,436,578.03, we added current firm's cash and marketable securities, subtracted current market value of debt and the value of the firm's outstanding options, which is an expected expense for the company. Then, we sensitized the DCF model to increase our confidence in the made assumptions. We used exceed returns as the main variable for the sensibility analysis. Thus, we decided that the firm's worst case is to earn no exceed returns and destroy value (ROIC < cost of capital). For an optimistic scenario, we decided to let the company earn 2% of exceed returns in perpetuity (which is high due to the assumption of full matureness in the company's life cycle). The DCF valuation generated a range value from $8.45 to $15.24 per share. The base scenario for the value of the stock is $14.01 per share.
Recommendation This ratio proposal proved that firm's system or the Wendy’s International, Inc optimization is reducing total revenues but increasing margins. The firm will continue to invest in growth, opening more stores. Royalties and rental income will gain share in revenues. CAPEX is expected to slightly decrease as reinvestment needs diminish. High payout ratios will persist for some years and FCFE will start to grow and stabilize. The firm is paying stockholders more than what it can afford. However, this does not affect firm's debt profile. Indicators show firm's good debt repayment capacity in the short and long term. In the past years, stock's price growth and high payout ratios have made Wendy’s International, Incorporated a good company to invest in.
Ref: https://www.referenceforbusiness.com/history2/31/Wendy-s-International-Inc.html http://www.ohiohistorycentral.org/w/Wendy%27s https://quotes.wsj.com/WEN/financials https://www.prnewswire.com/news-releases/the-wendys-company-reports-first-quarter-2018results-300644658.html file:///C:/Users/ACER/Downloads/Annual%20Report%202017_web.PDF https://seekingalpha.com/article/4082992-wendys-company-improving-financials-overvaluedstock https://seekingalpha.com/filing/3757088 https://accountingexplained.com/financial/ratios/?fbclid=IwAR0dSnEylc6NhGyteESqkF_gVxZ4pc HCJw2-VI7Lw8-dHL4t-DT2Q2xqdis
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