Friday Winners: Wendy's/Arby's, IDT Corp. and ArcSight
Wendy's/Arby's seeks a Possible Exit
Shares of Wendy's/Arby's Group (NYSE: WEN) are up +6% on word that the fast-food operator may be taken private. If that happens, it would cap a long string of moves enacted to enrich the company’s shareholders -- especially its largest holder, Nelson Peltz. His investment firm owns 23% of Wendy’s/Arby’s, and he originally saw the vehicle as a potential cash cow, figuring he simply needed to prod management to boost sales levels up to those posted at rival McDonald's (NYSE: MCD). While he was at it, he figured he could work similar magic on the struggling Arby’s chain of restaurants. By combining the two, he could boost purchasing synergies and bring a fresh approach to the respective menus. Eventually, he told investors, the company could sharply boost cash flow.
Try as they may, nothing has really worked. Sales of Wendy’s have improved only modestly, while sales at Arby’s have remained disappointingly weak. And even as they have streamlined the expense structure, that hoped-for cash flow growth has yet to materialize. Media reports imply that another investor has approached Peltz about a buyout, but if history is any guide, that’s a ruse. This is probably just another move by Peltz in a series to unlock value for his stake. By taking Wendy’s/Arby’s private, he can cherry-pick whatever assets he wants, and bring the company public once again down the road.
Action to Take --> Shares ran up to $5.55 a few months ago on hopes that first-quarter cash flow would look better than it did. Any buyout would likely need to meet or exceed that price to avoid the appearance of “stealing the company on the cheap.” Shares, about $1 below that figure, look pretty appealing here, or simply on the cash flow levels in place. If a deal doesn’t come to fruition, and the fast food chains can show even modest same-store sales gains, this could still become a great cash flow growth story. So one way or another, it looks safe to buy this name while it’s in play.
Cyber Security in the Spotlight
Soon after taking office, the Obama administration announced plans to boost spending to protect our nation’s key government networks and utilities. It had become apparent that foreign governments had increased their efforts to infiltrate our most vulnerable data centers, and the initiative was aimed at boosting both defensive and offensive cyber efforts.
That spending is now paying off for ArcSight (Nasdaq: ARST), which is a leading vendor of cyber security software and services to governments and large corporations. The company just announced that fiscal fourth quarter sales rose+41%.
During the next few years, ArcSight looks set to keep growing, with analysts pegging top-line growth at +15% to +20% for each of the next two years. Beyond 2012, though, it’s fair to wonder if growth can be sustained. With Uncle Sam as its biggest customer, and a potential change in the White House in 2012, federal support of cyber security efforts may wane. And shares already trade for more than 25 times projected 2012 profits of $0.86 a share.
Action to Take --> Today’s +22% move in the stock is impressive, but may represent most of the upside we’ll see in this stock for awhile.
IDT remains a Challenge to Value
How would you like to own a company for free? That’s the longstanding offer in place for investors in IDT Corp. (NYSE: IDT), which has typically been valued for the cash sitting on its balance sheet. In fact, until recently, the stock was valued well below the company’s net cash. Simply put, many institutional investors have looked under the hood, and then walked away from the seemingly cheap stock. That’s because management has been fairly secretive, neglecting even to have anyone ask questions on its conference call. And management has always pursued a mishmash of different businesses without any real focus. IDT’s core telecom business has been in slow decline, and other newer businesses have not ramped up quickly enough to offset that drag. And the company has generated negative earnings before interest, tax, depreciation and amortization (EBITDA) for each of the past six years.
Despite all that, shares are up nearly +15% on Friday, thanks to an unexpected -- and unexpectedly large -- profit. A combination of higher cash flow at the telecom unit and sharply lower overhead gets the credit. And if IDT can continue to post quarters like this one, then shares would be quite undervalued.
Action to Take --> Look before leaping. IDT has had temporarily impressive profit gains in the past and if investors had a better sense of the company's future revenue and profit dynamics, they’d warm up to this stock. Shares may go higher, but you should steer clear of investments that are managed in relative secrecy.
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StreetAuthority LLC does not hold positions in any securities mentioned in this article.