Why J.P. Morgan Is Upgrading Wendy's

In a report published Thursday, JP Morgan analyst John Ivankoe upgraded the rating on

from Neutral to Overweight, with a price target of $12. The recent weakness in Wendy's share price and visible out-year FCF generation warranted an upgrade in rating, Ivankoe said, while adding, "[W]e now see value in the stock at $10.11 following its recent high of $11.58 on May 21st." Ivankoe expects Wendy's multi-year FCF/Equity yield would improve "as the franchise mix increases, capex falls, and stock buyback achieves ending share count of 371m end F14 to 234m end F17." Wendy's capex guidance for F17 and F18 at ~$80m and ~$70m, respectively, appeared "very high as it includes approximately $30m for new units (which could be zero) and high company responsibility for technology benefitting the ~95% of stores owned by franchisees," the JP Morgan report stated. While pointing out that the company's remaining stake in Arby, valued at $150 million in its books, currently had "no income statement impact," Ivankoe added that there was a good chance that Wendy's market value investment in Arby's brand was higher than the book value, given the recent valuation increases in the group.