Why Did Wendy's Company Stock Gain 25% in 2016?

By Daniel B. Kline Markets Fool.com

What happened

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Wendy's (NASDAQ: WEN) had a very strong 2016, which cements the success of management's efforts to turn the brand around.

After reporting solid third-quarter results, the chain raised its outlook for 2016 adjusted earnings per share (EPS) to $0.40 to $0.41 from its previous guidance of $0.39 to $0.40; that's about a 23% jump from 2015. In addition, the company said it expects 2016 adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to come in at the high end of its previously issued range, of flat to up 1% compared to 2015.

Those prediction sent shares in the company, which had been relatively flat for much of the year, much higher to close 2015. After ending 2015 at $10.77, the company's stock finished 2016 at $13.52, a 25% gain, according to data from S&P Global Market Intelligence.

Image source: YCharts.com.

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So what

Wendy's shares did not pop just because the company had a decent quarter, or even a good year. Investors are starting to believe that the once-struggling brand has found a road map to compete in the competitive fast-food space.

"Our solid third-quarter results demonstrate the positive benefits of our brand transformation efforts," CEO Todd Penegor said in the company's Q3 earnings release. "Despite the ownership of 433 fewer Company-operated restaurants relative to last year, we were able to deliver high quality earnings, with franchise revenues contributing a higher amount to the bottom line. Driven by our balanced marketing approach and a continued focus on profitable customer count growth, the North America system accelerated same-restaurant sales in the third quarter."

Wendy's has also delivered 15 consecutive quarters of positive same-restaurant sales. In addition, the chain has been making steady progress modernizing its stores, and reducing company ownership to less than 5% of the entire system.

Wendy's has been modernizing the look of some of its stores. Image source: Wendy's.

Now what

Wendy's has an ambitious list of goals that it's trying to hit by 2020. These include raising average unit sales volume to $2 million, adding 1,000 new restaurants (while closing 500 others, for a net gain of 500), and updating the look of at least 60% of its North American restaurants.

"Going forward, we intend to buy and sell restaurants to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development and accelerating Image Activation adoption," Penegor said. "We are also facilitating franchisee-to-franchisee restaurant transfers to ensure that we are putting restaurants in the hands of well capitalized franchisees that are committed to long-term growth."

Wendy's has a plan and it has been executing it well. These are realistic goals for 2020 that the company has steadily built toward and should be able to reach.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.