DIN – Reality vs. perception

On Friday DIN rose 30% on the back of a 13D filing by the company’s largest shareholder, Southeastern Asset Management, and a strong market. Southeastern says that it is converting its ownership filing to 13D from 13G “in order to be more active in corporate governance and management matters, and to have the ability to enter into discussions with third parties concerning proposed corporate transactions of a significant nature. In this situation, Southeastern has talked to the Issuer's management, and will have additional conversations with management and/or third parties, regarding opportunities to maximize the value of the company for all shareholders.”

The filing goes on to say “Southeastern is engaged in the business of investment management of its clients' assets and pursues an investment philosophy of identifying undervalued situations and acquiring positions in undervalued companies on behalf of its clients. In pursuing this investment philosophy, Southeastern analyzes the operations, capital structure and markets of companies in which its clients invest and continuously monitors the business operations of such companies through analysis of financial statements and other public documents, through discussions with knowledgeable industry observers, and with management of such companies, often at management's invitation.”

The part that say’s “often at management invitation” is interesting given the current situation at DIN. Given the current economic crisis facing every casual dining operator DIN is in crisis mode, or should be. The company is leveraged at 7x EV/EBITDA and has been operating with an interim CEO since the end of September. The company desperately needs to sell assets to relieve the burden of excess leverage to give the company breathing room. In addition, management is cutting costs thru layoff’s, significantly reduced bonuses and reduced vacations, which is not an environment that will foster significant goodwill with the company’s employee base. Lastly, the Applebee and IHOP franchisees are faced with P&L inflation, lower traffic and increased discounting resulting in lower store level cash flow.

So what can DIN do to create long term value for shareholders? Let’s remember this is a restaurant company so the options are limited. To start, the stock is not undervalued relative to its peers. Using a NTM EBITDA range of $330-$350 million, DIN is trading at around 7.5x EBITDA versus its peers at 5x. The most effective way to build value for shareholders is to get more customers in the door paying full price, but that’s not likely anytime soon. The only real option the company has is to sell assets beyond what has already been announced. Given current sales trends and limited access to capital assets sales in this environment is nearly impossible. Additionally, no person in his right mind would pay more than 3-4X EBITDA for Applebee’s assets. Needless to say, with the stock selling at 7.5x EV/EBITDA selling assets at those prices would be dilutive to DIN and would not create shareholder value.

My guess is that Southeastern could act as a buffer between an angry franchise community and company management. Southeastern’s track record is impressive and they own stocks for years, but the change in to a 13D from a 13G is a defensive move not offensive. DIN is going to need miracle to save this ship.


The gaming industry’s problems are wide and varied, but unemployment is certainly one of them. As we’ve highlighted in past posts, unemployment has been a key macro indicator in explaining gaming revenue changes in most markets with the exception of the Las Vegas locals market where it’s all about housing.

We can see on the map which metropolitan areas are seeing above U.S. average unemployment rates. St. Louis, Memphis and Chicagoland are enveloped in red on the map (above national average unemployment). However, as depicted on our chart, the trends in these markets are less negative than those in the Las Vegas, Texas, and Louisiana. The situation in those areas is quickly deteriorating.

This is especially true in Louisiana with both Shreveport-Bossier and New Orleans seeing a degenerating situation. Moreover, trends in Dallas and Houston, the big feeder markets into Louisiana, are also negative sequentially. This is potentially troubling for a company like Pinnacle Entertainment which generates approximately 75% of its EBITDA in Louisiana and has been posting some of the best operating results in gaming.

Turning to Atlantic City, this market receives a large proportion of its visitors from the NY and Philadelphia metropolitan areas. The AC market is one we have been negative on for quite some. While the October yoy unemployment figures are not bad, the trend is getting worse, as can be seen in the chart. TRMP, BYD, and MGM are public companies with exposure to AC. Harrah’s Entertainment on the private side is also at risk.

In the Las Vegas locals market, it is no secret that Boyd and Station Casinos have faced grim prospects. We’ve expounded on the housing situation at length and determined that housing has been the only statistically significant macro factor in driving gaming revenues for the LV locals market (LV LOCALS: HOUSING TRUMPS EVERYTHING, 11/30). In line with this, to the extent that unemployment and economic malaise affects the already deflated housing market, unemployment is a factor worth monitoring. Next to Los Angeles, the unemployment picture here is the worst in the country.

The national trend is important for the Las Vegas strip, which depends largely on tourist dollars. November’s national unemployment trend affirms the October sequential and yoy negative trend. In 2007, 88% of visitors to Las Vegas were from the United States. 25% of all visitors came from Southern California. Unemployment in California is rampant and the attached chart shows that LA and San Diego have seen a dramatic increase in unemployment. San Diego and LA have both seen a sequential increase in the yoy change of unemployment rates from the third quarter to October. The national and SoCal statistics bode badly for MGM, a company highly invested in the Strip. MGM has committed a vast amount of capital to expanding its Las Vegas Strip exposure with project CityCenter.

Rory Green
Junior Analyst

US Regional Economics Part II: Retail Exposure

Not all states are created equal when it comes to unemployment. We analyzed trends in all 50 states, and weighted every retailer’s real estate portfolio accordingly. Some surprising results…

Employment is clearly the hot topic in the market today. Yes, the aggregate unemployment rate matters, but as noted in my 12/2 post (US Regional Economics: It Matters… A Lot) we need to look at which states are seeing the greatest sequential changes in employment trends. We all know that markets like California, Florida and Nevada have been tough – but the key today is that the next round of states are starting to roll over.

We took our analysis a step further and looked at every retailer in the US with more than 5 stores – public and private – that sells apparel/footwear. We weighted each company’s store portfolio with the incremental change in employment by state.

We grouped them into three groups 1)The Good, 2) The Bad, and 3) The Ugly. I wasn’t thrilled with the Clint Eastwood metaphor and pics below, but my Analyst Zach Brown is a big fan, and he did such a dang good job on this that I had to give in.

The charts below (click to enlarge) speak for themselves, but here’s a few quick callouts.
1) Out of the 80 companies plotted, Liz Claiborne retail has the lowest risk on the list, while Jones New York comes in dead last (highest risk).

2) Department stores, and anyone with heavy mall exposure were right in the middle of the pack. Not a huge surprise, given the lack of regional focus.

3) But Sears??? Near the top of the ‘safe’ list?? That one surprised me.

4) TJX at the safe end, and Ross Stores polar opposite?

5) VF Corp retail is way up the list too. But retail is such a small percentage of total company sales such that this does not help the fundamental story much.

6) Skechers looking really bad.

7) DSW – an ultimate zero – is on the risky list too.

We have this analysis run for many companies that are not listed on the charts below. Ping me or someone on my team for assistance.

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SP500 Levels Into The Close...

What a wild ride we’ve had today. From the alarmists ringing the consensus sirens this morning to the shorts being squeezed this afternoon, this is what makes a market. This is the best game there is. This remains a market to be traded, not owned.

Fortuitously the last 9 orders I have plugged into our virtual Portfolio have been BUY or COVER ones. I buy low, and sell high – it’s not any more complicated than that. Rather than getting all hopped up here covering after a 5% intraday squeeze, be patient – a nice little trading range is quietly being established here in the SP500. See the chart below. Here are my levels:

SELL “Trend” = 884.36
BUY “Trade” = 814.96

In terms of my Asset Allocation Model, today I have moved our US Cash position back down to 65%, and took my zero position in US Equities up to 3%. The turtle will win this American race. Don’t rush into anything. Buy’em when they’re red.

Eye On Financials: XLF, Immediate Term View

I am getting a lot of great questions on this topic today. The US Financials are flashing a positive divergence relative to the SP500, with the XLF (financials etf) trading +1% in a down -2% tape.

The “shark line”, as we like to call it, for the XLF lies overhead at $12.77. All of the panic covering underneath that line is not particularly relevant data in my macro model. If the XLF fails to overcome and close above the shark line, there is an immediate downside strike of $10.55 in play – that’s -12% lower.

In terms of US Financial stocks, we covered our short position in Morgan Stanley (MS) on Monday 12/1/08 at $12.36/share. Away from my long standing core thesis that the legacy full service brokerage/investment banking/research model is broken, currently we are short Bank of America (BAC), for three reasons: 1. The BAC Bailout Merrill deal getting approved (bad) 2. This week’s flattening of the US yield curve (bad for returns long term; think Japanese banks), and 3. Complacency (short interest is shockingly low at less than 2%).



I’m a pure fundamental guy so I sometimes need help when it comes to entry points. Luckily, I’m partnered with Keith McCullough who is the best trader I know. Here are some of his comments:

• PENN: the best looking gaming stock, strong support built up at $17.86, closing above $23.26 and this one is off to the races

• BYD: doesn’t look great but support at $3.64

• ASCA: doesn’t look so good

• MGM: right on the line. bias to the short side

• WMS: massive resistance line developing at $26.59, breaking down and closing below 22.87, and $19 is in play

• WYNN: anywhere under $32 and I would buy the whole company

• HMIN: flashes another positive divergence today, stock shaping up – needs to hold $9.18

• CCL: breaking down and closing below $20.52 is a big problem for this one, particularly if I am right on an oil squeeze coming

Here is my fundamental retort:

• PENN: the safest play in gaming right now. Great management team on the right side of the liquidity trade. Near term numbers are not good but PENN is poised to leverage its liquidity with a value creating acquisition (PNK? See my post LIKE PEANUT BUTTER AND CHOCOLATE – 11/11/08).

• BYD: the cheapest stock on a free cash flow basis I’ve ever seen with a 40% yield. The numbers will ugly for awhile but the company’s liquidity will allow it to steal market share, particularly in the Las Vegas locals market.

• ASCA: Q2 covenant bust is a mathematical certainty unless they raise sub debt. For this reason company is over-earning and estimates will fall 20% when they raise sub debt with a rate in the mid to high teens.

• MGM: LV is a disaster and getting worse. MGM is the poster child of the egregious exploitation of the easy money crowd. CityCenter is the wrong project at the wrong time in the wrong market. Overleveraged with little liquidity could pave the road to bankruptcy.

• WMS: Industry slot sales will fall off a cliff in 1H CY2009 due to cash strapped casinos delaying replacement sales and a dearth of new casinos and expansions. Yet, analysts continue to project 10% revenue growth over that time period. Pricing could be the next shoe to drop.

• WYNN: Great balance sheet, tons of liquidity, best operator, and exposure to the best long-term market in the world (Macau). Where do I sign up? Short term guys should wait for Keith’s levels on this one. Near term is choppy.

• HMIN: We like China. Citizens are traveling more. Solid long-term fundamental story.

• CCL: Industry Capex going up, cost of capital going up, ROI declining. On board spend ready to drop off a cliff.
I personally owns shares of PENN and PNK

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