Archive for June, 2014

Wendy’s ($WEN) – Stock Pick for 6/18/14

WendysLogo

Can a Pretzel Bacon Cheeseburger kick-start growth and recovery in a business? For Wendy’s ($WEN) it just may have. Since its debut last summer, it’s been getting great reviews from customers and the restaurant industry. The description certainly sounds tasty: “A delicious twist on our classic hot n juicy cheeseburger with a sweet & smoky honey mustard sauce, melted cheddar cheese and applewood smoked bacon all on a warm, soft pretzel bun.” The response was so positive that it was named “Best Limited-Time Offer” of 2014 by Nation’s Restaurant News’ (NRN) MenuMaster. It was so popular, it helped Wendy’s beat McDonald’s and Burger King in same-store sales growth in the 2nd half of 2013.

Although the sales have slowed down a bit since, the financial results for the 1st quarter still exceeded Wall Street expectations. Wendy’s had sales growth of 1.7%, even with the terrible winter weather most of the country had in that time period. It managed to improve its profitability by lowering costs and improving sales.

The company is taking on various strategic moves to boost its earnings and revenue. Currently, Wendy’s is focusing on the franchise model to improve its profitability. The company has been selling its stores to franchisees so that it can focus more on the menu and customer experience, leaving the operation of the locations to franchisee partners. Under this strategy, Wendy’s has completed the sale of 418 company-owned restaurants to its new and existing franchisees.

Privately held NPC International has made three separate purchases from Wendy’s to get to a total of 146 restaurants from Wendy’s. Clearly they see a lot of potential for all the changes that Wendy’s is undertaking and see it as a great opportunity. This is a positive for Wendy’s as it shows that an outside company believes in what they are doing and is willing to take so many of their restaurants into a franchise agreement.

Wendy’s has improved its restaurant designs and packaging and has trained its employees to be more customer-friendly. In addition, Wendy’s has added innovative limited-time items to its menu such as Tuscan Chicken on Ciabatta, Asian Cashew Chicken Salad, and BBQ Ranch Chicken Salad. These limited time offers are expected to play a prominent role in bringing more traffic to Wendy’s locations which will help grow sales in their permanent menu items.

It wasn’t just the burger that helped grow the business. They are also trying to revamp their image with their “Image Activation” program. Renovations include the installation of multiple flat-screen televisions, WiFi, fireplaces, lounge seating, and digital menus. 200 of its company-owned and franchised locations were remodeled as of the end of 2013. In 2014, the company expects another 200 more restaurants to undergo the remodeling. This will be split evenly between company-owned and franchised stores. By 2017, Wendy’s expects 85% of its company-owned locations to be converted to their new format.

Wendy’s posted adjusted EPS of $0.07 which more than doubled from Q1 2013’s $0.03. Now their consolidated revenues declined from the same period last year due to franchisees taking over 418 of its company-owned locations. However their net income skyrocketed from $2.1 million to more than $46.3 million.

Looking ahead, Wendy’s expects its adjusted earnings to be within $0.34-$0.36 cents per share in 2014 which is higher than levels in 2013. Management believes same-store sales growth will likely be in the range of 2.5% to 3.5% at company-operated restaurants.

If Wendy’s can continue to focus on innovation, improving the customer experience and quality, there is no reason they can’t continue to grow and beat out their rivals. As was stated before, they beat Burger King and McDonald’s in same-store sales growth in the second half of last year.

The current price of the stock is $8.38 and it has a dividend yield of 2.4%. Except for a spike in price in February, the price of the shares has stayed in the $8-$9 range. The highest analyst target price currently listed is $12. From the current price, that would represent a 43% increase. While I don’t see it gaining that much quickly, over the longer term, it should easily head that direction.

Although Wendy’s stock price performance has been weak this year, the company’s business has remained strong. Its strategies look really good and should result in earnings growth going forward. Any pullback in Wendy’s should be seen as a buying opportunity to take advantage of. In time, Wendy’s may finally be able to recover share price from the financial crisis in 2007.

Dean Foods ($DF) – Stock Pick for 6/17/14

dean-foods logo

It’s summer, and when it’s hot you might be thinking about some ice cream to help cool you off. Well look no further than Dean Foods ($DF).

Dean Foods Company, a food and beverage company, processes and distributes milk and other fluid dairy products in the United States. It manufactures, markets, and distributes dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix, and other dairy products; and produces and distributes juices, teas, and bottled water. The company offers its products under approximately 50 local and regional proprietary or licensed brands and private labels, such as the TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean’s, Garelick Farms, LAND O LAKES, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, PET, T.G.Lee, Tuscan, and others.

This stock has showed up on the analyst radar recently. Rating an upgrade in price target from KeyBanc and reiterating their buy rating. Then Trade-Ideas LLC identified Dean Foods as what they call a “storm the castle” stock after it crossed above the 200-day simple moving average on higher than normal relative volume recently.

KeyBanc increased its price target on Dean Foods as the firm, after speaking with a commodities expert, is more confident that the company will benefit from lower raw milk prices. The firm continues to believe that the company is an attractive takeover target with their portfolio of products and discounted share price. They have raised the price target to $22 from their previous $18.

Trade-Ideas LLC, as mentioned before, identified Dean Foods as a “Storm the Castle” (crossing above the 200-day simple moving average on higher than normal relative volume) stock candidate. On top of specific proprietary factors, Trade-Ideas identified Dean Foods as such a stock due to the following factors:

• DF has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $50.1 million.
• DF has traded 1.5 million shares at the time of their analysis.
• DF is trading at 1.86 times the normal volume for the stock at this time of day.
• DF crossed above its 200-day simple moving average.

“Storm the Castle” stocks are worth watching because trading stocks that begin to experience a breakout can lead to potentially massive profits. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock is then free to find new buyers and momentum traders who can ultimately push the stock significantly higher. Regardless of the impetus behind the price and volume action, when a stock moves with strength and volume it can indicate the start of a new trend on which early investors can capitalize on. In the event of a well-timed trading opportunity, combining technical indicators with fundamental trends and a disciplined trading methodology should help you take the first steps towards investment success.

Then from the last earnings call, the following was reported:

The company’s current return on equity greatly increased when compared to its ROE (Return on Equity) from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Food Products industry and the overall market, Dean Foods return on equity significantly exceeds that of both the industry average and the S&P 500.

Dean Foods reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. During the past fiscal year, Dean Foods increased its bottom line by earning $3.39 versus $0.26 in the prior year.

From the look of things, there seems to be a good deal positive. Currently the price is $18.15. If KeyBanc is correct in their target price, that represents a 21% increase from where it is today. Current options trading suggests the market is looking for a price in the next month to rise to around $19.20 which would be an almost 6% gain from the current price. Then you have a dividend that is yielding 1.6% currently which will give you a bit of income in the process.

If Dean Foods can continue to post positive earnings per share growth and raw milk prices continue to improve, then I think they will have the opportunity to meet the analyst price targets. It will make that ice cream taste much sweeter in the hot summer sun.

 

Update On Previous Picks – Staples, Casey’s and Republic Airways

Looking back on previous picks for this year so far, we have a bit of a mixed bag. These picks were Staples ($SPLS), Casey’s General Stores ($CASY) and Republic Airways Holdings ($RJET).

Lets start off with Staples, which was my pick back in January. This stock has been a disappointment since I made the pick when they were 13.83. I felt that the market was going to buy into the fact they were the 2nd largest e-commerce site in the world behind Amazon now. I thought this would also be reflected in the earnings, but at the time it was not. After Office Depot reported, they dropped down in the $11 range. When time for their own earnings was coming up, the price started to rise up back to $13. Unfortunately when they reported earnings they dropped back in the $11 range again.

I still feel they are a long-term play and will rise again, but you may have to hold on for a while to see it finally come to fruition. Analysts that are covering the stock also believe that it has a good shot at getting really good gains and with the dividend, it makes it attractive as well. So I see this as a buying opportunity to load up on more cheap shares. Several have a price target around $15, so that would be close to a 40% gain from the current price.

Then we have Casey’s General Stores. When I suggested them at 67.13, they stayed in a range right around that price not varying by more than a dollar or two. That was until they released their earnings report on the 9th of June and that’s when they rose to 75.12 on the 10th. That was good enough to get an almost 11% gain from when I suggested it.

They had good sales growth in all sectors of their business that beat their expectations of where they wanted to be. They have strong goals for the next year, and if they can meet it they continue to have quite a bit more upside. Several analysts are looking for a price to eventually be in the $80+ range.

Finally, we have Republic Airways Holdings. They have been on a bit of a roller coaster ride. When I suggested them on February 27th, they were at $9.58. Then after that they eventually dropped down to a low of $7.97 on April 14th. Hopefully you used that as an opportunity to buy some more shares cheap as they eventually went as high as $11.18 on June 9th.

They’ve seen their air traffic increase by 15% in May and recently an analyst raised their price target to $17 from their previous $13 target. So things are looking up if you continue to hold on to the shares.

From the period of my suggestion, to their most recent high on the 9th, they have gained almost 17%. Not too shabby.

I will update soon with some more stocks to take a look at. Happy investing!