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?
|Sector||Restaurants & Bars|
|Date||09 October 2017|
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.
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.
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|
|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%|
|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%|
|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|
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?
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Submitted October 09, 2017 at 08:47AM by shane_stockflare