For this week's superstock scan, I have identified two potential superstocks - one from the US and one from Singapore. For my readers fr...

Weekly Superstock Scan 15 Jan 2018 - 19 Jan 2018: Denny's Corporation (DENN)

/
0 Comments
For this week's superstock scan, I have identified two potential superstocks - one from the US and one from Singapore. For my readers from the US, it is not advisable for you to read this in the middle of the night and hungry, as my first superstock of the week is Denny's Corp (DENN).






Denny's is one of America’s largest franchised full-service restaurant chains based on the number of restaurants. At December 28, 2016 , the Denny’s brand consisted of 1,733 franchised, licensed and company operated restaurants around the world with combined sales of $2.8 billion , including 1,610 restaurants in the United States and 123 international locations. 90% of the total restaurants were franchised or licensed, and Denny's is committed to the a 90% franchise model.


Technical


Since October 2016, DENN is trading at a relatively tight range of $11-$14. Last week, price finally broke out of the range to close at $14.80. The trading volume of the week was 3 million shares, slightly more than double its average trading volume.

The cause of the spike in price was Denny's announcement of the preliminary financial results for fourth quarter and fiscal year 2017 during the week. Denny’s fourth quarter domestic system-wide same-store sales increased 2.2%, including a 2.2% increase at domestic franchised restaurants and a 2.1% increase at company restaurants. DENN also reiterated its full year 2017 guidance expectations.


Fundamental


Including the most recent quarter, DENN recorded 15 consecutive quarters of year-on-year EPS growth. This level of consistency does not appear to have been factored into the price as the price of the stock remained fairly stable over the past few years.

Remodelling with "Heritage" Reimage Program

Denny’s rolled out its “heritage” reimage program in late 2013. The updated look reflects a more contemporary diner feel to further reinforce the America's Diner positioning. The remodelling program has been a key contributor to DENN's same store growth.


By end year 2017, more than 67% of the system has been remodelled, and DENN is targeting to remodel 80% of the system by end 2018.

New Franchisee Agreement

During 2014, DENN implemented a new franchise agreement, which included a royalty rate of 4.5% and an advertising contribution of 3%, excluding any incentives. Only about half of DENN's franchisee are operating under the new agreement. Existing franchisees will elect to migrate to the new fee structure over the next decade as incentives under previous franchise agreements expire, increasing the level of profits for DENN.

Denny’s On Demand platform

DENN is in the early stage of executing on the Denny’s On Demand platform initiative. Transactions through the new mobile online ordering platforms with built in partnership with Dispatched Delivery Network company Olo, have contributed approximately $12 million sales to-date towards the growth in their off premise business. In addition to the delivery capabilities through Olo, DENN has third-party master partnership agreements in place with post Postmates, GrubHub, DoorDash and most recently, UberEats.

Currently, off-premise sales represent about 8% of total sales. The Denny's on Demand platform also allows DENN to reach the younger demographics and also the late night diners. 

International Expansion

DENN's current international footprint of 125 restaurants has grown by more than 60% since 2009 with their current pipeline of approximately 80 planned openings. DENN announced a development agreement for the United Kingdom that will add 10 locations to the United Kingdom over the next several years with the first restaurant opened in Wales at the end of the 2017.

Matrices
- Large float of 59.3 million shares with a average weekly trading volume of 0.3 million shares. The float is thus almost 200 times its average trading volume, limiting its potential for big moves.
- DENN is trading at 26 times its trailing twelve months EPS.

Risk Factors/ Things I do not like:


  • High Valuation: With DENN trading at 26 times its TTM EPS, there is a good chance that it is already fairly valued and upside might be limited.
  • Call to cut Anti-Biotics: An investor coalition that presses for corporate responsibility is calling on Denny's Corp to stop buying or producing meat raised with medically important antibiotics. Members of the Interfaith Center on Corporate Responsibility (ICCR) have had previous success in convincing most U.S. chicken producers to stop using medically important antibiotics. It may be a good thing if DENN to serve animals raised without antibiotics, but no doubt there may be addition to cost and reduction of profits.


You may also like

No comments:

Powered by Blogger.

Disclaimer

All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.