A taste for Denny’s? $DENN

aside: please comment at the r/investing post, thanks.

I don't live near a Denny's so can't speak from experience, but the Google Reviews are mixed to say the least.

Is the stock any tastier?

Key Stats

Ticker DENN
Sector Restaurants & Bars
Latest price $13.05
Value $877M
Daily vol $4M
Date 09 October 2017
Financials SEC Filings
Website http://www.dennys.com

1. How hungry are you?

Denny's Corporation operates a franchised full-service restaurant chain. The Denny's brand consisted of 1,733 franchised, licensed and Company-operated restaurants around the world, including 1,610 restaurants in the United States and 123 international locations.

1,564 of its restaurants were franchised or licensed and 169 were Company-operated. Franchisees pay circa 4% of sales to Denny's as a fee, and about 300 of the 1500 franchisees let / sublet from Denny's. Also, they've been locating new restaurants at Pilot J and Kwik "travel centers". trivia: Buffett's BRKA just agreed to acquire Pilot J.

Recent financials

Given the mix of owned / franchised restaurants the top line can be a little lumpy, as each time they buy a franchisee the top line jumps. Why? They get 100% of the revenue (and costs) instead of just 4% of the revenue. For a "better" metric, we need to look at "same-stores sales" to see what the core business is doing. In 2016 it grew 1%. Not great, eh?

The bottom line is a more useful metric. 2016A took a hit with a pension settlement eating into profits, and on an adjusted basis the company did circa $0.55 in earnings.

Metric 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $488m $463m $472m $491m $507m $530m $546m
EPS $0.23 $0.26 $0.37 $0.42 $0.25 $0.56 $0.62

So the outlook for 2017 is almost no growth in cash flow. And at the recent results they talked about generating approximately $55m of free cashflow this year.

Strangely, Denny's doesn't pay a dividend. They've been around for over 60 years, and profitable a long time. But no dividends. Instead they've ramped debt in recent years by doing share buybacks. And now the company has $263m of net debt equal to 2.7x operating profit. So it's approaching a level that makes me uncomfortable. Plus their debt agreement restrict them from going much higher, so exception cash returns look like they may be a thing of the past.

2. Prefer to eat elsewhere?

The stock market menu is as diverse as the food, and Denny's looks like one of the smaller offerings… though if it owned all it's restaurants it would be $2.8bn of sales, not $0.5bn. Similarly, the mix of owned / franchised restaurants inflates the margin, as their gross margin on owned is 18% and on franchises is 71%.

So, it's hard to say if one biz is better than the other on an operational basis.

Companies Latest Sales Operating Profit Return on Equity
Denny's Corporation $519M 18% N/A
BJ's Restaurants, Inc. $1,023M 12% 13%
Bob Evans Farms Inc $418M 16% 10%
Buffalo Wild Wings $2,023M 13% 16%
Cheesecake Factory Inc $2,296M 12% 23%
Cracker Barrel Old Country Store, Inc. $2,926M 14% 38%
DineEquity Inc $622M 36% 32%
Brinker International, Inc. $3,151M 14% N/A
Jack in the Box Inc. $1,614M 22% N/A
Red Robin Gourmet Burgers, Inc. $1,323M 10% 2%
Sonic Corporation $516M 30% N/A
Texas Roadhouse Inc $2,100M 12% 16%
Shake Shack Inc $316M 16% 10%

And if we turn to valuation, I'm struck by the bunching in the 20s for most of the stocks. Though there are some outliers, Shake Shake on the high side $DIN and $EAT on the low side.

Net net, 23x earnings and a 6% free cash flow yield for a business that's seeing no growth at the bottom line and no growth at the top line, seems generous.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
DENN.O $877M 23x N/A 0% 6%
BJRI.O $657M 19x 12% 0% 15%
BOBE.O $1,543M 36x 13% 5% 4%
BWLD.O $1,588M 23x 13% 0% 12%
CAKE.O $1,943M 16x 11% 2% 14%
CBRL.O $3,710M 17x 4% 4% 11%
DIN $811M 10x 4% 9% 11%
EAT $1,556M 10x 9% 5% 23%
JACK.O $3,002M 25x 14% 2% 9%
RRGB.O $856M 24x 10% 0% 12%
SONC.O $1,025M 20x 15% 2% 12%
TXRH.O $3,559M 26x 18% 2% 8%
SHAK.K $1,240M 66x 23% 0% 5%

Though here's a different way to look at it. They bought 10 of their high performing franchisee's in 2016 for $13m. So that is less an 1x sales. If we value their 170 owned restaurants at 1x sales, the 300 leased at 0.5x sales and the remaining 1300 at 0.25x sales then take away the debt, we'd get to $800m of value. That's not far from the current $877m value of the business, and that's before we talk about control premiums.

3. Wall Street re(starant)view

The Wall Street consensus view is Buy, from the 4 brokers that cover the stock, they put a target price of just $14 on the stock. That's just 6% up on today's price.

In fact the stocks up 14% in the last three months, even though the earnings forecasts are down slightly. So the valuation's up substantially, despite no significant driver, and the stock missing earnings forecasts in both 1st and 2nd quarter.

Sure they have a hilarious Twitter campaign underway. But there's been a brutal hurricane season, if you'd not noticed, and that may impact the overall restaurant market.

And if you are technically minded…that ramp is on low volumes, with the RSI & BB Bands indicating that it's over bought. Though no doubt there are other technicals that say it's about to ramp higher (e.g. 50 day MA v 200)!

4. A taste for Denny's

Whether I like the food and format, is irrelevant. There's little growth, no sign of margin improvement, and they've ramped the buybacks so far. On top of that, I'm hardly happy to see the CEO say on the recent 2Q earnings call:

As we noted during our last earnings call, we expect the challenges currently facing the restaurant industry to persist for the foreseeable future.

And from the 1st quarter earnings call:

Following a challenging wrap up to 2016, the first quarter of 2017 proved to be another volatile one for the restaurant industry. We believe this reflected a number of forces at play, including intense promotional activity within the industry, as commodity deflation persisted, the continued gap between grocery and restaurant pricing, the influence of a retail slowdown on dining out occasions, and federal income tax refund delays among others.

So, no, I don't have a taste for $DENN. You?


View the archive of Stock a Day posts at it's subreddit stockaday.

Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Author: /u/shane_stockflare, Shane Leonard, CFA. CEO @ Stockflare

Submitted October 09, 2017 at 08:47AM by shane_stockflare
via http://ift.tt/2zawa2P

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