2023-05-03 10:45:03 ET
Summary
- We previously saw value in Dine Brands Global but wanted a sizable pullback to do some buying.
- Q1 beat on the top and bottom line.
- We have increased our estimates for Dine Brands Global, Inc.
- Debt is a concern, but this stock can be traded.
We previously believed Dine Brands Global, Inc. ( DIN ) had a compelling valuation when it was in the low $70 range, but did not yet pull the trigger. Today, we believe the stock can be entered, as despite the risk of a coming recession, we continue to believe in an investing theme of "people need to eat." We believe that a recession will hit restaurants differently depending on what clientele they cater to as well as how well they are able to attract traffic. We believe that you will see higher end, more expensive "per plate" type restaurants will feel the pinch harder, as will many smaller but more expensive local family restaurants. At the same time, we feel fast casual, lower-dollar type sit-down restaurants will benefit from families still trying to enjoy a meal out but trying to stretch their dollar further. Sure, right now the jobs market remains hot, especially with today's ADP payroll numbers, but the impacts of all of the rate hikes are yet to be felt. We think you can trade this stock.
The play
Target entry 1: $63.00-$63.50 (25% of position)
Target entry 2: $61.50-$61.75 (35% of position)
Target entry 3: $60.25-$60.50 (35% of position)
Target exit: $70
Stop loss: $55
Estimated profit: 15%
Options consideration: We like a buy-write strategy with the recent spike back from lows in the VIX.
Note: This type of trade is what we lay out for members at BAD BEAT Investing week to week.
Discussion
Remember, Dine Brands Global, Inc. is a franchised type restaurant model that hosts brands such as Applebee's and IHOP. The company put out some strong numbers for Q1. At the same time, Dine Brands Global, Inc. is now a value play at these levels, even with some signs of a 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 and local family establishments. Let us discuss the just reported Q1 .
Sales dip but beat, strong comparable sales figure
Growth in comparable sales is key for restaurants. For Dine Brands, overall sales fell in Q1 versus the prior year, but the main reason for this was the sale of 69 Applebee's restaurants. Dine Brands reported total top-line revenue of $214 million for in Q1 2023. These sales of $214 million were a decrease of 7.1% compared to Q1 2022. However, this was an increase of $6 million from the sequential quarter. The comparable sales figure impressed. Dine Brands saw positive comparable store restaurant sales at both Applebee's and IHOP. Applebee's year-over-year comparable same-restaurant sales increased 6.1%. IHOP's year-over-year domestic comparable same-restaurant sales increased 8.7%. This is a very strong result.
Earnings roughly stable, EPS grows
Dine Brands Global, Inc. margins are under pressure from rising food and labor costs, but with pricing power, they have offset a good chunk of this expense pain. As rate hikes percolate in the economy we expect to see declines in food inflation and labor inflation which will be a long-term benefit for Dine Brands. The revenue of $211 million surpassed consensus estimates by $7 million. Earnings per share adjusted beat estimates.
EBITDA was up slightly from last year. Dine Brands reported EBITDA of $66.4 million, up from $65.2 million a year ago. Despite better gross margins than a year ago, selling expenses were up $9.6 million from a year ago, but as adjusted, EPS of $1.97 was a major beat by $0.27, and rose from $1.54 from Q1 2022. At these levels, with the forward view, we have a good combination of value and growth.
Valuation
After the selloff over the last two months, the valuation is attractive based on performance numbers. We are trading at less than 10X TTM earnings. That is attractive to us to wait for improvement and stabilization in the expenses line. This comes as the company is being strategic to open new shops, and watching margins tightly through pricing power and hiring practices. Further, the dividend offers a 3.2% dividend yield. We continue to expect dividend increases moving forward. While the yield is not overly impressive, an over 3% yield is always welcomed when buying a new position.
Looking ahead
One risk factor here in addition to inflation, recession, and competition is that the Dine Brands Global, Inc. balance sheet is levered. That adds some equity risk premium. The debt is high here relative to flows. The leverage ratio is 4.5X, which we would like to see come down in coming quarters. Total cash, cash equivalents and restricted cash was $235 million, of which $182 million was unrestricted cash. Keep in mind the debt is a concern because with higher rates for longer versus an easy money climate from 2009-2021. As such, future refinancing of debt will hit hard on interest expense lines. As we look ahead, EBITDA should be about $250 million, flat from 2022. For the year, we now see EPS of $6.10-$6.60. This translates to less than 10X FWD EPS.
This is attractive, but with the debt, we previously liked Dine Brands Global, Inc. shares closer to $65. Now that we are under that mark, we think you do some buying.
For further details see:
Dine Brands: The Price Is Right, People Need To Eat