Over the last six months, Dine Brands’s shares have sunk to $35.04, producing a disappointing 6% loss - a stark contrast to the S&P 500’s 7.2% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Dine Brands, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Dine Brands Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Dine Brands. Here are three reasons why there are better opportunities than DIN, plus one stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Dine Brands’s demand has been shrinking over the last two years as its same-store sales have averaged 1% annual declines.
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Dine Brands’s operating margin decreased by 4 percentage points over the last year. Even though its historical margin was healthy, shareholders will want to see Dine Brands become more profitable in the future. Its operating margin for the trailing 12 months was 17%.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Dine Brands’s $1.62 billion of debt exceeds the $104.2 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $215.8 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Dine Brands could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Dine Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Dine Brands falls short of our quality standards. Following the recent decline, the stock trades at 7.2× forward P/E (or $35.04 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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