Over the weekend, Barron's Senior Editor Vito Racanelli highlighted Hedgeye Restaurants analyst Howard Penney in his story, "DineEquity Shares Could Fall 30%." It's been Penney's contention that DineEquity (DIN), the $1.6 billion owner of chains like Applebee’s and IHOP is struggling under the weight of its poor decisions.
Shares of DIN are down -3.6% today. Racanelli writes:
"DINEEQUITY HAS about $1.3 billion in net debt, and a market capitalization of $1.5 billion. The stock trades for 10.5 times enterprise value (market value plus net debt) to 2017 estimated earnings before interest, taxes, depreciation, and amortization of $265 million. That compares with an average EV/Ebitda ratio of eight to nine times for rivals. Hedgeye’s Penney thinks that DineEquity’s multiple could drop to eight times EV/Ebitda as business conditions worsen, implying a stock-price target of $56 a share.
He notes that DineEquity’s net debt-to-Ebitda ratio of 4.8 times likewise is materially higher than the industry’s 1.5 times. More important, DineEquity has $372.5 million of off-balance-sheet liabilities for franchisee leases. Penney says this liability hasn’t been factored into the stock price."
(Click here to continue reading on Barrons.com.)
What does this mean for DIN?
“I think Applebee’s needs to put dollars in the bank because they need to support their dividend and their 62% dividend payout ratio," Penney says in the video below. "If you look at the net income less dividends that’s eroding pretty quickly.”
As Racanelli writes in Barron's, "Sales and profit have been falling this year mainly due to sluggish traffic and menu misfires at Applebee’s, and it appears that the company had to dip into accumulated cash to cover its dividend and stock buybacks."
Click below to watch Penney make a compelling case for why a dividend cut is on the horizon. If it does, look out below...