Feast on DineEquity

 | Jun 04, 2014 | 7:26 AM EDT
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It's all coming together right now for DineEquity (DIN). You just don't know it. That's how I feel after interviewing Julia Stewart, the no-nonsense CEO whose first job as a waitress was at an IHOP -- which she now commands, along with Applebee's.

Much of the success of this chain's stock -- which has rallied from $65 last fall to the current $80 at a time when many other restaurants have seen their stocks fall or stall -- has to do with changes Stewart has made to improve the overall health of both her divisions. The company has launched a major facelift for Applebee's and instituted technology that allows you to swipe your card at your table and not give it to a server. This is in part because Stewart knows that customers don't like giving up their cards, and in part because they don't like the wait. She has re-skinned Applebee's in a process that, after the facelift, dramatically lifts store comps.

She has also introduced all sorts of more visible pricing schemes on the menus at IHOP which, astoundingly, has led to a larger ticket size. Stewart says pricing knowledge eliminates guesswork. Guests seem to fear the worst when they don't see the prices of the sides, which had been IHOP's way. Once they know them, they order them, as they hate surprises when the check comes more than just about anything else.

But what's really coming together for Stewart and DineEquity is the pricing of "the other guys," the fast-casual companies that had been so potent for so long. Your ticket for a sit-down, family-style meal at a restaurant such as IHOP or Applebee's barely costs that much more than a takeout meal at Panera (PNRA) or Chipotle (CMG). Stewart would tell you that the other guys just keep raising prices, but her franchisers -- and they are almost 100% franchised -- are comfortable with current pricing. It's a relatively new phenomenon, but it is a major reason that the company reported sharply better-than-expected comparable-store sales and overall revenue when it recently reported.

Even as DineEquity stock has had a good run since last fall, it is down slightly for this year along with the sluggish restaurant group. I don't know how long it will stay that way, as it has a very expensive piece of paper, a $761 million 9.5% note that is callable this October. When that is refinanced, I think it will lead to more spending to boost sales at a national level; more international expansion, as the company's 3,600 restaurants system-wide leave plenty of room for expansion; and a higher dividend from a company that already gives you about the highest dividend in the industry.

It's all that for a company that's barely worth $1.5 billion, even as it is the No. 1 breakfast restaurant and the No. 1 casual dining-dinner restaurant in the country. Seems strangely low to me. Seems like a real buy.



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