Investors have been gobbling up shares of DineEquity Inc., franchiser of the Applebee’s and IHOP chains, for the past few months, and it looks like their appetite for the Glendale company’s new business model isn’t sated yet.
Since the company announced last fall that it had completed plans to sell almost all of its company-owned restaurants to franchisees, shares have risen more than 25 percent, reaching above $70 for the first time and outperforming the stocks of other restaurant operators.
Shares continued their climb last week, closing Jan. 23 at $72.34, 5.5 percent over the close of a week earlier, making DineEquity one of the top gainers on the LABJ Stock Index for the period. (See page 48.)
Behind the stock’s continued rise is speculation that improved financials could soon lead the company to pay a regular dividend or start repurchasing shares.
Analysts noted that along with selling its remaining company-owned restaurants, DineEquity has repaid much of its debt. The company’s long-term debt has fallen to $1.2 billion from about $2.3 billion in 2007.
“They’re now in a position that free cash flow can begin to accrue to shareholders rather than just to repay debt,” said Bryan Elliott, senior restaurant analyst with Raymond James & Associates Inc. in St. Petersburg, Fla.
Elliott suggested DineEquity would likely begin a share repurchase program to reward shareholders, while Will Slabaugh, a vice president and research analyst at Stephens Inc. in Little Rock, Ark., said he’s heard reports that the company might start paying a regular dividend.
Kevin Mortesen, vice president of communication for DineEquity, said he could not comment on that speculation. But he did note that executives “are certainly pleased with the share performance and believe it reflects investor confidence in DineEquity’s fully franchised business model, our iconic brands, strong management and franchisee leadership, and demonstrating a steady pay-down of debt since the acquisition.”
Indeed, investors remain upbeat about the company’s plan to stay out of operating restaurants and focus on franchising. That shift, which started in 2007 and was completed in October. The company now has 3,550 locations, only 34 of which are company owned.
Franchised restaurants give the company a smaller revenue stream but a much higher-margin one as franchisees, not DineEquity, cover the costs of food and labor.
“It’s just a much more stable business model,” Slabaugh said.
For the first nine months of 2012, during which the company still operated dozens of company-owned restaurants, DineEquity reported a gross margin of 74 percent for its franchised operations and about 15 percent for company-owned restaurants.
That helps explain why DineEquity shares have outperformed those of other restaurant operators. The Bloomberg index of U.S. casual restaurant companies is up just one-third of 1 percent over the past three months, while DineEquity shares are up 26 percent.
