DineEquity Is a Hidden Delight

 | Nov 11, 2013 | 1:53 PM EST  | Comments
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You can make a fortune if you aren't a snob. Isn't that the takeaway of one of the better-performing of the restaurant chains out there, DineEquity (DIN), parent of Applebee's and IHOP?

Here's a stock that has doubled in a little more than a year without any real support from the analyst community. Two out of seven major analyst houses have Buys on it, but I find even the Buys lukewarm. That's despite a terrific reacceleration in sales at its IHOP unit, or as Wells Fargo queried at the top of its Market Perform note after the last quarter, "unexpected same-store sales resurgence, anyone?"

Unfortunately, Wells Fargo, despite those kind comments, is using a $78 to $82 valuation, not a lot of give from its current height of $80 but above where it had been at $70 to $74, no doubt because the stock soared from $71 to $82 in one day after its recent upside surprise.

KeyBanc is not much different in its coverage. The firm cites DineEquity's higher-than-average debt, left over from the Applebee's acquisition, and lower-than-average growth, for keeping its Hold recommendation. Applebee's could easily pay down that debt if it wanted to, and I believe its growth is accelerating. And while it has reduced debt by a billion dollars in the last six years, it, instead, has given you a terrific dividend, which, even after this run, gives you a 3.75% yield.

Goldman Sachs, too, is struggling with its view of the chain. Goldman noticed the incrementally more positive sales increases, especially compared with the industry, and it agrees with me that the cash flow is growing quickly enough to allow expensive debt to be paid down if DineEquity is so inclined. And Goldman raised its price target recently, but only because that target, too, was overrun when the stock spiked. Goldman, though, just can't seem to pull the trigger.

Some of the reluctance of analysts to get behind it comes from Applebee's, the other leg of the story, which delivered minus 0.4 compared with the plus 0.5 that had been anticipated, and any shortfall to estimates will be viewed negatively, even though the whole cohort had a very tough time during this period.

Still, though, DineEquity has done much to improve Applebee's since buying the chain in 2007, including cutting administrative and food costs while re-engineering the menu to get a higher ticket from each customer. Like all successful restaurant chains these days, it regularly rolls out new concepts to keep the stores fresh.

What really draws me to the chain, and what I like best about DineEquity, is its model. The company is 99% franchised, which we know from Domino's (DPZ) can be a license to print money. You support the chains nationally, and you rake in fees -- that allows quick cash accumulation, and you save a boatload on labor. DineEquity has gone from having 32,300 employees five years ago to having slightly more than 2,000 now. That's despite having more than 2,000 Applebee's restaurants and more than 1,500 IHOPs.

So what's really going on here? I pulled up with Julia Stewart, the CEO, after she came to the floor of the exchange to talk about how the chain is giving out free meals today to veterans and actively serving members of the military, and we chatted about why the analysts keep missing the story. We both mused that perhaps they don't live the life that I have, a couple of kids, in the 'burbs, who have always loved Applebee's and feasted on IHOP whenever possible.

Yep, I think it's the snob factor holding DineEquity back. Here's a $1.5 billion company whose market cap barely dents the size of the possibilities here. Even after this big run, I think this one is a Buy, and the analysts will, like they did with Domino's, be dragged kicking and screaming to recommend it at much higher levels. 

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