Although Dine Brands (currently trading at $35.15 per share) has gained 6.6% over the last six months, it has trailed the S&P 500’s 13.9% return during that period. This might have investors contemplating their next move.
Is now the time to buy Dine Brands, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Dine Brands Will Underperform?
We don’t have much confidence in Dine Brands. Here are three reasons why DIN doesn’t excite us, plus one stock we’d rather own.
1. Flat Same-Store Sales Indicate Weak 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 within its existing dining locations has barely increased over the last two years as its same-store sales were flat.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Dine Brands’s margin dropped by 10.2 percentage points over the last year. If its declines continue, it could signal increasing investment needs and capital intensity. Dine Brands’s free cash flow margin for the trailing 12 months was breakeven.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Dine Brands’s $1.69 billion of debt exceeds the $97.5 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $213.8 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. With its shares lagging the market recently, the stock trades at 7.8× forward P/E (or $35.15 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.
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