JPMorgan upgrades Wendy's to buy, saying new cost-cutting strategy is working

Published Fri, Feb 24 201710:47 AM EST

JPMorgan on Friday upgraded Wendy's to overweight from neutral, saying the new cost-cutting strategy from CEO Todd Penegor and CFO Gunther Plosch is paying off. "We can now see management having complete fluency and command over the tactics and details to achieve their broad strategic goals," equity analyst John Ivankoe wrote in a research note. Penegor and Plosch, who took his position in May 2016, have streamlined Wendy's business model by subsegmenting the company into five main areas: company restaurants, real estate, international, franchising and corporate. JPMorgan says that strategy clears the way for Wendy's to reduce operational expenses and focus on growing its cash flow. "Benchmarking was done for each segment individually, and the company has challenged itself to do a 'clean sheet' redesign for the most efficient and effective structure," Ivankoe wrote, citing the potential for the new strategy to help Wendy's grow its business and exceed earnings expectations. Over the past year, investors have welcomed the news, sending shares of Wendy's up about 42 percent compared with a gain of 17 percent for the S & P consumer discretionary sector. Wendy's, 1 year Source: FactSet As part of its new plan, JPMorgan says Wendy's could reduce its general and administrative expenses by about $555 million over the next three years. "We generally expect the cash impact from restructuring to be offset by a positive working capital benefit as a result of timely collection of royalties per franchise agreements," Ivankoe wrote. JPMorgan says other initiatives such as short-term changes in incentive structure for franchise owners, the automation of drive-through kiosks and new menu options, could also pay off. The opportunity for Wendy's to expand internationally in markets such as Mexico, Argentina, Brazil, Japan and the Middle East, is another catalyst that could take the stock higher, according to JPMorgan. "As McDonald's has developed a very enviable family experience and Burger King has marketed itself as a more adult 'American' burger offering, Wendy's is planning on pushing its brand to the higher end of its peers," Ivankoe said. Given the opportunities ahead, JPMorgan says shares of Wendy's could trade at $15 in the next 12 months, implying a gain of about 12 percent from Thursday's close. — CNBC's Michael Bloom contributed to this story.

An employee hands a customer their order at the drive-thru window of a Wendy's restaurant in Peoria, Illinois.

Daniel Acker | Bloomberg | Getty Images

JPMorgan on Friday upgraded Wendy's to overweight from neutral, saying the new cost-cutting strategy from CEO Todd Penegor and CFO Gunther Plosch is paying off.

"We can now see management having complete fluency and command over the tactics and details to achieve their broad strategic goals," equity analyst John Ivankoe wrote in a research note.

Penegor and Plosch, who took his position in May 2016, have streamlined Wendy's business model by subsegmenting the company into five main areas: company restaurants, real estate, international, franchising and corporate.

JPMorgan says that strategy clears the way for Wendy's to reduce operational expenses and focus on growing its cash flow.

"Benchmarking was done for each segment individually, and the company has challenged itself to do a 'clean sheet' redesign for the most efficient and effective structure," Ivankoe wrote, citing the potential for the new strategy to help Wendy's grow its business and exceed earnings expectations.