Why The Wendy's Company (WEN) Shares Were Too Hot to Handle This Morning

By Alex PlanesFool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Wendy's are trading up about 8% near the end of the trading day after slipping from an opening-bell gain of 10% today. Wendys' investors have reacted favorably to news that the company will franchise offmany of its company-owned locations in an effort to cut costs.

Continue Reading Below

So what: Wendy's reported its fourth-quarter results before the opening bell this morning, and the headline numbers weren't particularly exciting. The popular burger and chicken purveyor earned $0.10 per share on an adjusted basis, against $0.06 in GAAP earnings, on fourth-quarter revenue of $502 million.

Analysts had expected$509.1 million in revenue, so Wendy's fell a bit short on the top line, but its adjusted EPS was in line with Wall Street's consensus. Full-year revenue of $2.1 billion and adjusted EPS of $0.34 were more or less in line with analysts' consensus estimates of $2.07 billion on the top line and $0.34 in EPS. Looking ahead, Wendy's now expects to earn $0.33 to $0.35 in adjusted EPS for the 2015 fiscal year, which is a weaker range than the $0.39 full-year EPS forecast of Wall Street analysts.

However, it was Wendy's executives' announcement that the company would sell off about 500 of its company-owned restaurants to franchisees that seems to have caught everyone's attention. This move, which will cut Wendys' corporate direct ownership of its restaurants down to about 5% of all systemwide locations by the middle of next year, is touted as a move toward lower costs and higher margins, which is an easy pitch to make to investors who've seen far higher margins under the almost-entirely franchised golden arches of Wendy's largest competitor. This headline number actually omits the planned "Canadian system optimization initiative," which will divest 100 restaurants in 2015 on top of the 500 locations targeted for divestiture in the company's fourth-quarter report.

Now what: Wendy's reported 967 company-owned restaurants at the end of its 2014 fiscal year, and it's aiming to divest 325 of these locations by the end of 2015. That would cut its systemwide direct ownership rate down to about 9% from its current 15% rate, assuming the company grows its total restaurant count by roughly 3% this year over 2014's year-end total of 6,515 locations. CEO Emil Brolick warned in Wendy's press release that the reduction in direct ownership will have a "short-term impact" on earnings growth this year, but investors seem willing to overlook that in favor of the likelihood that Wendy's will emerge a stronger and more profitable company at the end of its restructuring.

Wendy's stock isn't cheap, at a trailing P/E of 32, but the company not only expects to open 1,000 net new restaurants by the end of 2020, it also expects to boost systemwide margins from last year's 15.8% to 20% by the end of 2020 as well. If this plan pans out, today's valuations -- especially when paired with a solid 2%-plus dividend yield -- look rather reasonable for long-term investors.

The article Why The Wendy's Company (WEN) Shares Were Too Hot to Handle This Morning originally appeared on Fool.com.

Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.