Wendy's No Longer A Sell, Has Upside On Refranchising And International Growth: Credit Suisse

In a report published Tuesday, Credit Suisse analyst Jason West upgraded the rating on Wendys Co WEN from Underperform to Neutral, while maintaining a price target of $10. The analyst cited “improved risk/reward” following the recent decline in the company’s shares as the reason for the upgrade.

Although Wendy's reported disappointing SSS for 2Q15, the shares already reflected a discount to franchised peers and “will likely be supported by the transition to a predominantly franchised business over the next year, providing a floor for the stock,” analyst Jason West wrote. He added that the mix-shift would likely lead to significant margin expansion, increase in ROIC and higher FCF.

In the report Credit Suisse noted that there could be potential upside if:

• Wendy's announced further refranchising, beyond its 95 percent target
• The company established a “credible international growth strategy”
• There were additional cuts to run-rate G&A or capex spend

“Our key concerns here are that remodeled units fail to hold initial sales gains or McDonalds’ sales recovery takes hold, pressuring competitors such as WEN. However, neither of these two scenarios seems likely near-term, and WEN’s P&L is becoming less sensitive to SSS trends as the franchise mix rises,” West explained.