Summary
- Dine Brands Global, Inc. stock still needs to pull back despite being relatively attractively valued.
- The debt and the leverage is a risk here.
- We see flat EBITDA and roughly flat EPS in 2023.
- Dividend yield approaching 3%.
- We see Dine Brands Global, Inc. benefiting from disinflation and a weaker consumer that trades down, but let the stock fall.
We continue to believe in the mantra that "people need to eat" when it comes to investing. We believe that a recession will hit restaurants different. We think higher end, more expensive "per plate" restaurants will feel the pinch and fast casual, lower dollar "per plate" type restaurants will benefit from families still trying to enjoy a meal out but trying to stretch their dollar further.
Once such name that just reported earnings is Dine Brands Global, Inc. ( DIN ). This is a predominately franchised type model that reduces some risk, that hosts brands such as Applebee's and IHOP.
The company put out mixed results, but Dine Brands Global, Inc. valuation in our opinion is compelling in the low $70's even in the face of a possible slowdown. We think a mild recession will actually be a benefit to this company, as the fast casual nature of these restaurants takes share from more expensive brands. Let us discuss the just reported Q4 .
Sales and the all-important comparable sales figure
For those that follow our work you know that the key indicator to watch for when considering investing in restaurants is their comparable sales. Negative comparable sales almost always mean the stock is a sell, unless they are trending off of a bottom. We digress. The fact is that growth in comparable sales is very telling. For Dine Brands, overall sales fell in Q4 versus last year, but the primary reason for this was the sale of 69 Applebee's restaurants. Dine Brands reported total top-line revenue of $208 million for in Q4 2022.
These sales of $208 million were a decrease of 9.4% compared to Q4 2021. Again, this was due to the 69 store sales in the previous quarter. When we look at the all-important comparable sales figure, we find that they are strong. In fact, Dine Brands enjoyed positive comparable store restaurant sales at both Applebee's and IHOP. Applebee’s year-over-year comparable same-restaurant sales increased 1.7%. IHOP’s year-over-year domestic comparable same-restaurant sales increased 2.0%.
Earnings roughly stable, EPS grows
As with other competitors, Dine Brands Global, Inc. margins are under pressure from rising food and labor costs. With that said, if the Fed's actions work, then it means that food inflation and labor inflation should come down, and that will be a long-term benefit for Dine Brands. The revenue of $208 million was a miss against estimates . But despite a lower top line than expected, and higher expenses and margin pressure, earnings per share adjusted beat estimates.
EBITDA was down slightly from last year. Dine Brands generated EBITDA of $57.0 million, but that was down from $60 million a year ago. Selling expenses were up $9.9 million from a year ago, but as adjusted, EPS of $1.34 was a beat by $0.11, and rose from $1.32 last year. Not too bad with all of the food cost inflation and labor costs.
Valuation
We think that Dine Brands Global, Inc.'s valuation is attractive on these numbers. Over the last 12 months, we saw $6.20 in EPS. At $73 per share, we are trading at 11.8X TTM earnings. That is attractive to us to wait for improvement, especially as the company is leaning out operations and being strategic to open new shops. The dividend offers a 2.7% dividend yield, which is not attractive relative to bonds, but we expect dividend growth now that the dividend was reinstated in 2021 following COVID.
Looking ahead
We believe that 2023 will see growth 2022. Pricing power can help offset the margin issues. A weaker consumer will not help if the economy really gets nailed, but for now, we think Dine Brands is well-positioned for food inflation to come down, labor costs to normalize, and consumers to switch to more discount brands.
As we look ahead, the balance sheet is a concern, with some sizable debt leading to a leverage ratio of 4.4X. Total cash, cash equivalents and restricted cash was $325.0 million, of which $269.7 million was unrestricted cash. This debt, however, is the biggest risk to the investment, and that is why shares are at a discount. With higher rates, future refinancing will hit hard on interest expense lines. The company does have $221 million available on a revolving credit facility too.
Make no mistake, inflation is still an issue and this will weigh, but all told the company sees EBITDA of about $250 million, flat from 2022. We need a pull back. For the year, we see about flat EPS of $6.00-$6.50. This translates to less than 11.5X FWD EPS. This is attractive, but with the debt, we like Dine Brands Global, Inc. shares closer to $65.
Take-home
Let this market pull back more and consider buying Dine Brands Global, Inc. closer to $65. The debt is an issue here, but we also see the consumer trading down to more fast casual dining in coming months, which will benefit Dine Brands Global, Inc.
For further details see:
Dine Brands: Fast Casual Name Benefiting From Disinflation