The past six months have been a windfall for Denny’s shareholders. The company’s stock price has jumped 41%, hitting $6.22 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Denny's, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think Denny's Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Denny's for now. Here are three reasons we avoid DENN and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.
Denny’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.
2. Fewer Distribution Channels Limit its Ceiling
With $457.2 million in revenue over the past 12 months, Denny's is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.
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.
Denny’s $415.1 million of debt exceeds the $2.22 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $77.07 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. Denny's 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 Denny's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Denny's, we’re out. Following the recent surge, the stock trades at 15.2× forward P/E (or $6.22 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
Stocks We Would Buy Instead of Denny's
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