As my regular readers know, I am bearish on Tim Hortons. I think that the market is currently pricing them significantly higher than what I believe to be their intrinsic value. However, the fact that Tim Hortons is being priced so high, makes Wendys look very attractive given the 85% stake that they hold in THI. Given the closing price of Tim Hortons on friday, they have a market cap of about $5.75 billion. This makes Wendys stake in the company worth approximately $4.9 billion. Wendys market cap currently sits at $7.2 billion. Utilizing our first grade math skills, we will subtract Wendys Tim Hortons stake from their current market cap, and arrive at a figure of $2.3 billion. Considering that Wendys will be selling off its 85% stake before years end, the market is only valuing Wendys core business at our $2.3 billion figure that we derived. Lets take a look at some ratios using our adjusted valuation of Wendys * Trailing P/E: 10.2 McDonalds: 17 * Forward P/E estimate: 7.4 McDonalds: 14.6 * Price to Sales: 0.6 McDonalds: 2.1 * Forward Price to Sales: 0.56 McDonalds: 1.95 By all of these metrics, Wendys looks very cheap. Earnings growth should pick up nicely, as displayed in their forward P/E estimate. With management exploring various cost cutting and efficiency models. Also, with their proceeds from the Tim Hortons sale, I would expect them to pay down their outstanding debt. They only have $625 million in debt on the books, but at 15% interest (a stab, i dont know what the actual rate they are pating is) this detracts $100 million from earnings. By paying that off, and implementing the efficiency model that management has suggested will be put in place, I believe they could beat current estimates. Based on relative valuations, shares could double within the near. Throw in the possibility of exceeding expectations, and shares could appreciate even more. The Tim Hortons IPO has created an opportunity to snatch up shares in Wendys at a very low valuation. This price discrepency must be corrected, as fundamentals govern valuations in the long run. This is a great value play at these levels, Im sure Graham would concur. |
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