This post is kind of an educational post. A lot of people are currently talking about WEN and JACK. I want to give you some advice on what to look for in such a turnaround setup.
Normally, if you want to compare a company to another you will look into financials and P/E ratios and revenue growth etc. But for this comparison all of the named does not matter as much. So instead of looking at P/E ratios what am I looking at to see, if a stock is likely to turnaround?
A turnaround is very complex. I try to break it down to the 2 main causes of a failing company.
# 1. Cash and Debt
The first one is debt. If a company is unable to pay its debt it goes bankrupt or has to take on more debt to pay the old debt, which will result in a downward spiral. To find out if a turnaround is in the realm of possibility, you should look at the debt of a company in relation to cash and cashflow. If a company has no cash and a negative cashflow it‘s always bad. If a company has lots of debt and only a small positive cashflow it‘s also bad. So for turnaround you either want to see if a company is able to turn profitable and reduce their cashburn (otherwise the will have to take on more debt) or if they are able to increase their cashflow and pay off debt. So what does this mean for both of the companies I mentioned?
WEN debt $4.8b > $2.58b JACK debt
WEN cash $299m > $43m JACK cash
WEN NCF $59.4m > 17.1m JACK NCF
Now if you compare these values, you can see that JACK has a way higher debt/cash ratio than WEN showing increased leverage. It‘s NCF to debt ratio is also much smaller which means, that it will be much harder/ take much longer to pay back the debt. Still both companies have a positive cashflow, what makes it possible to pay back the debt although it gets increasingly harder the more leveraged a company is. So here WEN seems to be more likely for a turnaround.
# 2. Revenue and Margin
The second thing I think is important for the turnaround of the company is revenue and earnings. For a good company it is important to have positive earnings because thats the only way to sustainable scale it and increase value for the shareholders. In this particular case, revenue is also interesting because it shows if the business is failing in general or if the costs of the product are just to high. A reduction of these costs while having stable revenue can also turn earnings positive. But this only works if revenue is not in steady decline. If the latter is the case, sooner or later you won‘t be able to cut enough costs in order to keep earnings positive. So how are the numbers of our companies looking?
Revenue WEN $540.6m > $254.3m JACK revenue
Earnings WEN $22.7m > $10.2m JACK earnings
Net margin WEN 4.2% > 4% JACK net margin
You can see that both companies have positive earnings and nearly equal net margins of 4%. So they are not burning cash but also not generating that much. If a sudden decline in revenue or spike in cost happens, this could turn their margins negative. So apart from WEN being the bigger company, earnings- and marginwise they are on the same level. So for a turnaround they should both focus on increasing revenue growth and cutting costs to improve earnings and margins. But which of stock is more likely to achieve a turnaround?
# Conclusion
In my opinion this mostly depends on the capabilities of the C-Suite. Good management is what makes a turnaround possible in the first place. The new CEO of JACK has proven his skills at scaling Taco Bell during challenging times. The CEO of WEN is also a known industry figure and had great success at Potbelly. So again both companies seem to be equal. You could now talk about brand recognition etc. but thats really subjective. So I would argue that a turnaround is possible for both companies, although it is more likely to happen to WEN because of their smaller debt and leverage ratio.
My takes:
If you want to make some quick money on a possible squeeze: $JACK
If you’re looking for deep value and a turnaround: $WEN
Numbers were taken from 10Qs of last quarter.
Positions:
I own 1000shares of JACK with an average of $13.5
NFA