A Juicy Restaurant Stock at a Slender Valuation

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Casual dining restaurants had a hard run during the Great Recession, as consumers frequently opted to eat at home or pursue cheaper options due to decreased purchasing power. Now, as economic recovery has taken hold, this type of dining seems be becoming more profitable again, with increased customer volume driving revenue up. One casual dining stock has remained in the background lately, overshadowed by hot stocks such as Chipotle (NYSE: CMG), but seems to offer good value at an attractive price. This stock is DinEquity (NYSE: DIN).

Stock at a Glance

DinEquity develops and operates full-service restaurant chains, with two main restaurant concepts: Applebee’s Neighborhood Grill and International House of Pancakes. The stock has a modest market cap of $1.36 billion and only 640 employees, yet punches way above its weight in terms of earnings. Having had a spectacular run over the last twelve months, gaining nearly 50%, the stock isn’t far from its 52-week high. It does not offer a dividend, and is quite volatile with a beta of 2.48.

Earnings and Margins

While earnings growth could have been more impressive over last year, the company beat every quarter since Q3 2011. For Q3 2012 EPS beat by about 10%, but was down a penny compared to same period a year ago. However, EPS is still higher than most of its larger competitors. At $7.20, it is higher than Brinker International’s (NYSE: EAT) $2.03 despite their larger market cap, and higher than Darden’s $3.50. Darden (NYSE: DRI), who operates franchises such as Red Lobster, Olive Garden, and Bahama Breeze, has been mostly meeting expectations in the last few quarters, but hasn’t been putting up huge growth.

Where DinEquity really shines is the expected 5-year EPS growth rate, which is currently at a massive 55% according to CNBC. Compare this to Brinker’s 11.2% and Darden’s 3%. Chipotle Mexican Grill comes fairly close with its 37.5%, but it is currently trading at a somewhat inflated multiple leading me to be cautious on the stock. Finally, DinEquity has considerably higher margins than the competition, which is rather significant in the restaurant industry, as margins are typically quite low. DinEquity has an operating margin of 25%, trashing Darden’s and Brinker’s 9% and higher than Chipotle’s 17%.

Valuations and Metrics

DinEquity is cheaper than its competitors based on TTM P/E, which currently sits at only 10.28x, compared to Darden’s 13.45x, Brinker’s 16.5x, and Chipotle’s rather intimidating 37x. However, DinEquity’s forward P/E is a lot less attractive at 17.92x, so that’s definitely something to take into account. However, the stock has an absolutely stellar return on equity of 67.6%. It is important to mention that debt is a fairly serious issue. Total debt currently stands at $1.47 billion, which gives the company a huge total debt to equity ratio of 520. Darden’s ratio stands at 157, while Chipotle has virtually no debt and almost half a billion in cash.

Bottom Line

As casual dining seems to be making a comeback in terms of earnings, some of these stocks have been performing rather well. An example of these is DinEquity, which is doing well in terms of earnings and has a huge 5-year expected EPS growth. Currently trading at a discount to the industry in terms of P/E, the stock may be able to continue its strong run and deliver additional returns to shareholders. However, debt is a worry that should lead investors to perform additional due diligence on the stock. 

DUJames has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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