Taking Another Tour With The Wendy’s Company (WEN)

Challenges

The fast food industry, including The Wendy’s Company (NASDAQ:WEN), will have to deal with higher commodity and employee costs. Wendy’s management estimates that 40% of the food cost are in beef and chicken equally. Due to higher corn prices and increase in demand, these two commodities are likely to continue their price increase in 2013. Further, employment expenses will likely rise as the Affordable Healthcare for America Act starts to be phased in.

The fast food industry is labor intensive, and headwinds include an immigration reform requiring stricter proof of eligibility to work. However, Wendy’s plans to counter these negatives by improving efficiencies, closing unprofitable locations, and discontinuing breakfast to improve margins. Most companies in the fast food industry increase prices as a last resort, and it will not be a surprise if we see synchronized price increases this year. All this brings uncertainty, which makes investing in fast food retailers riskier.

To wrap things up

Based on a number of metrics, although The Wendy’s Company (NASDAQ:WEN) is cheaper than those of its competitors, it still carries significant risks. This is because food inflation and employment costs could hurt the company more severely than expected. On the other hand, its image activation campaign (tier 2 and 3) is still untested. This year will be important for Wendy’s, as the company is undertaking a number of initiatives.

It’s important for investors to make speculative bets on companies’ strategy changes in order to achieve high returns, and have a well-diversified portfolio. Over the past six months, the company’s shares have risen significantly. It could be safer if investors stay on the sidelines, and see how the rest of the year unfolds for The Wendy’s Company (NASDAQ:WEN). The stock could be a great long-term investment, if the company is successful with its initiatives, and is able to overcome the challenges.

The article Taking Another Tour With This Fast Food Company originally appeared on Fool.com and is written by Abir Karmakar.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.