Dine Brands Global Stock: Cheaper Than It Really Is (NYSE: DIN)
Two very iconic restaurant chains that exist in the United States today are Applebee’s Neighborhood Grill + Bar and International House of Pancakes (aka IHOP). At the center of these two businesses is a company called Restaurant brands around the world (New York Stock Exchange: DIN). This operator, which owns, franchises and operates these restaurant concepts, is quite a big player in the food space. However, the company’s financial performance has been quite erratic in recent years. On the positive side, the company is trading at levels that should be considered attractive. But when you consider that there are other players in the market who are probably in better shape than he is, I can’t get this excited. At the end of the day, I decided to rate the business as an “expectation” because while I don’t think it’s a bad opportunity, I certainly don’t think it’s a good one.
A game about dining out
As I mentioned before, Dine Brands Global is the owner, franchisor and operator of the Applebee and IHOP restaurant concepts. All combined, the system the company has consists of 3,426 locations, most of which are located in the domestic market. The vast majority of these locations are currently franchised. For example, at the end of last quarter, the company had 1,675 Applebee restaurants, of which only 69 were owned and operated by the company. Meanwhile, the company’s system includes 1,751 IHOP locations, none of which are owned and operated by the company. Most of them are franchised, while others are listed under licenses.
Today, Dine Brands Global generates revenue from four key sources. Much of its revenue comes from franchise fees associated with the thousands of restaurants in its network. The Company also generates rental income from lease or sublease agreements covering 598 IHOP franchise restaurants and two Applebee franchise restaurants. A modest amount of income, mainly in the form of interest income, comes from receivables for equipment leases and franchise expense accounts. And the company also generates revenue from the 69 Applebee-operated restaurants in its system.
Recent financial performance by Dine Brands Global has been rather mixed. If you were to look at the overall trend from a revenue perspective, the picture would generally be positive. Revenue grew steadily year over year, from $731.7 million in 2017 to $910.2 million in 2019. The COVID-19 pandemic really took its toll, sending revenue plummeting to $689.3 million in 2020. However, the business saw a drastic improvement in 2021, with mostly revenue recovery. at $896.2 million for that year. Much of the improvement in sales over the years is the result of positive comparable store sales. Under the IHOP brand, same-store sales were positive in two of the three years prior to the COVID-19 pandemic. Then, in 2020, those sales fell 32.8%. The good news for investors is that this decline was short-lived. In 2021, same-store sales under this banner jumped 40.2%. The photo was less nice when it came to the Applebee brand. In two of the three years leading up to the pandemic, same-store sales in its system were negative, with the COVID-19 pandemic subsequently knocking sales down another 22.4%. But just as was the case with IHOP, same-store sales improved significantly in 2021, jumping 38.2% year-over-year.
What’s baffling is the fact that the company’s number of locations in its system has only gone down in recent years. For example, the number of Applebee restaurants grew from 1,936 at the end of 2017 to 1,680 at the end of 2021 before dropping to 1,675 open today. IHOP’s image has been more favourable. The number of units in its system actually increased from 2017 to 2019, from 1,786 to 1,841. But then, in 2020, the company saw the number of units drop to 1,772 before finally falling to the 1,751 that are in service today. Management said it plans to close between 5 and 15 net restaurants throughout this year. So, although revenues may have increased in recent years, this is due to the reduced number of restaurants. Such a trend is unsustainable.
From a profitability point of view, the picture is rather interesting. These revenues have been ubiquitous in recent years, ranging from a low of negative $336 million to a high of $100.8 million. Cash flow from operations generally increased, eventually going from $65.7 million to $195.8 million. During this same time window, EBITDA followed a similar trajectory. It eventually went from $193.7 million in 2017 to $250.8 million in 2019. In 2020 it was only $135.9 million, while in 2021 it was for the bulk adjusted to $238.1 million. Even though the number of restaurants the company counts in its system has decreased, comparable store sales have improved. For the Applebee’s brand, store sales increased 14.3%. And under the IHOP brand, we saw same-store sales increase by 18.1%.
As far as the current financial year is concerned, the picture is rather mixed. Revenue is higher in the first quarter of 2022, reaching $236.4 million. This compares to $204.2 million generated in the same time a year earlier. In contrast, the company’s net profit fell slightly from $25.1 million to $24.9 million. Operating cash flow also deteriorated from $30.6 million to negative $7.8 million. Meanwhile, EBITDA is the only profitability metric that improved, eventually dropping from $52.7 million to $58.3 million.
Regarding the 2022 financial year, the only indications given by the management concerned the EBITDA. They said it should cost between $235 and $250 million. Halfway through, that would translate to a reading of $242.5 million. If we apply that same year-over-year change to operating cash flow, that metric should ultimately total about $199.4 million this year. Using this data, we can easily assess the company. For 2022 estimates, the price to operating cash flow ratio is expected to be 5.6. This compares to the 5.7 reading we get if we use 2021 results. Meanwhile, the EV/EBITDA multiple should be 8.8. This compares to the 8.9 we get if we use 2021 data. To put the company’s price in perspective, I decided to compare it to five similar companies. On a price/operating cash flow basis, these companies ranged from a low of 3.6 to a high of 10.1. And using the EV to EBITDA approach, the range was 4.3 to 10.8. In both cases, three of the five companies were cheaper than our prospect.
|Company||Price / Operating Cash||EV / EBITDA|
|Restaurant brands around the world||5.7||8.9|
|Brinker International (EAT)||3.6||5.2|
|Jack in the box (JACK)||10.1||10.8|
|Blooming Brands (BLMN)||4.3||4.3|
|The Cheesecake Factory (CAKE)||6.2||9.2|
|Arcos Dorados Holdings (ARCO)||8.3||7.5|
Based on the data provided, I will say that I like how cheap Dine Brands Global stocks are on an absolute basis. At the same time, the stock appears to be more or less fairly priced against similar companies. Add to that the fact that the company has a difficult history from a restaurant count standpoint and, under the Applebee brand, has had some rather difficult comparable store sales, and I find this to be a tough opportunity to grasp. . While some profitability metrics have increased in recent years, that’s not enough to make me a buyer. In fact, right now, I’ve decided to rate the company as an “expectation.”