DineEquity (NYSE:DIN), the parent company of two popular restaurant chains, reported a fourth-quarter net loss of $2.84. Excluding charges, EPS was 76 cents compared to 37 cents in the 2008 fourth quarter. For the full year, net income was 55 cents a share compared to a net loss of over $10 a share in 2009. When adjusted, the full-year 2009 EPS figure was $4.06 compared to $2.14 in 2008. The major changes between reported and adjusted profits was due to substantial intangible write-offs due to its acquisition of Applebee's in 2009.
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The Time Has Passed
DineEquity operates and franchises restaurants under the Applebee's and IHOP brands. Anyone familiar with the TV commercials knows that these two brands are very price conscious, a big plus during this economy. IHOP regularly trumps specials like $2.99 breakfasts, or buy one get one free. Applebee's, a step up in terms of prices, nonetheless caters to a money-saving crowd with deals of a $20 sit down meal for two people. The success of these ad campaigns is evident in DineEquity's numbers. Free cash flow in 2009 more than doubled to $133 million compared to $61 million in fiscal 2008. Despite the pricing promotions, operating margins at company owned Applebee's improved by nearly 3%. Yet the company has been moving more towards a franchise operating model, which led to sales increases of over 5% in these locations.
Anyone who saw the company's aggressive advertising campaign and focus towards franchising a year ago apparently stumbled on a bargain. Today, shares sit at $34 versus about $5 a year ago. Since the depths of the credit crisis, shares have been on a tear. (For more, check out Turnaround Stocks: U-Turn To High Returns.)
Moving Ahead of Itself
Where shares sit today, it may be time to pass on DineEquity. Including debt, the company's enterprise value sits over $2 billion against a market cap of $600 million. Based on adjusted EPS, the shares look incredibly cheap, however, the company is under intense competition from all angles. In addition to grocery stores, restaurant groups like Brinker International (NYSE:EAT) and Darden Restaurants (NYSE:DRI) also offer lots of cheap eat specials. In addition, Darden owns higher-end names like The Capital Grille which benefits from having wealthier and less economically-sensitive customers. Brinker benefits from being diverse - its restaurants include On The Border Mexican, Chili's and Maggiano's Italian.
Add the fact that shares are up over 40% so far in 2010 and nearly 400% in a year, and its hard to see the stock going much higher over the sustainable long term. Other popular breakfast chains like Denny's (Nasdaq:DENN) are constantly competing with the likes of IHOP for the breakfast dollar. However, Denny's shares, which trade for $2.91, haven't seen the success that Dine Equity has seen.
Price, Price, Price
As a business, DineEquity's quality is without question. However, today's valuation on the heels of a very rapidly appreciating stock price, prevents the company from being the great investment opportunity it was when shares were trading for $5, $10 or even $15 a share. In investing, price is what you pay, value is what you get. Right now, the price is not right for DineEquity. (For more, check out the Value Investor's Handbook.)
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