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How Wendy's Stayed Out of the Fire

Is Wendy's International (WEN) set to emerge as victor in the price war it refused to join? Wendy's has seen its stock tumble--along with that of other fast-food chains, including McDonald's, which started the price-cutting. Wendy's is now close to its 52-week low of 26 a share. McDonald's was first to offer hamburgers, including its Big 'n Tasty quarter-pounder, for $1. Burger King responded with a double cheeseburger for 99 cents. "The price war has spooked investors," says Roger Lipton, general partner at RHL Associates, whose portfolio of consumer stocks has gained 15% this year, after a 40% gain in 2001. He's betting on Wendy's, which he calls "the best-run food chain in the U.S.," to hit 40 in 18 months. The price war won't last, predicts Lipton. He says McDonald's will have to abandon its dollar menu because of pressure from its own franchisees, who oppose the cuts. Wendy's, with more than 5,600 restaurants, of which 4,400 are franchised, is the strongest player in the industry, he says. It trades at 12.5 times his 2003 earnings estimate of $2.30 a share, and six times cash flow. Dennis Milton of Standard & Poor's rates Wendy's a buy and says the price war will hurt rivals' long-term expansion plans. Wendy's, by contrast, has gained share by offering higher-quality products, he says. By Gene Marcial

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