Don't Flip Over This Stock in 2008

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Whatever time of day or night it is, I love breakfast. I always have room for a couple of fluffy pancakes, eggs over easy, and a grilled pork chop, complemented with a cup of smooth coffee with just enough creamer to make it that "brown paper bag" color.

No surprise, then, that Denny's (Nasdaq: DENN), CBRL Group's (Nasdaq: CBRL) Cracker Barrel, Bob Evans (NYSE: BOBE), and IHOP (NYSE: IHP) are among my favorite restaurants.

Unfortunately, Denny's Grand Slam breakfast may pack on a few pounds, but its stock won't fatten up your portfolio's returns. Like a pancake flooded with syrup, sluggish sales and weakening traffic have weighed down the stock prices in the last year. That's not something that satisfies my investment account.

IHOP has been no exception to general performance in this sector. It did seem to stand out like red strawberries on a stack of pancakes with whipped cream, rising 173% from the beginning of 2003 through September of 2007. But then the stock tumbled 50% from its peak before bottoming at the end of last year.

Because management managed to turn the company around, with improved service and creative new menu items, you'd think it be a natural choice for one of 2008's best stocks. Yet Motley Fool CAPS investors see a contrarian pick here.

Eggs beenabetter
After the company's dramatic fall, shares have turned sunny side up, recovering 26% of their value. The company's valuations now exceed its peers' and boast inferior expected growth rates. Despite this, IHOP remains a great company. But I fear some of the company's short-term plans coupled with probable setbacks from the weak economy, so I have to say the company's a lousy investment for 2008.

	Forward P/E	5-Year Growth	5-Year PEG
IHOP	15.71	11.80%	1.38
Denny's	13.59	30%	0.91
CBRL	8.15	12.50%	0.74
Bob Evans	12.53	12%	1.23

Data from Yahoo! Finance.

Trouble in pancake paradise
The first problems stem from declining customer traffic, which fell between 4% and 4.5% in fiscal 2007. This, of course, is a trend across much of the industry; many restaurants are serving fewer diners these days. That said, the tough economy by itself wouldn't be enough to turn me bearish on IHOP.

What concerns me even more for the near future is IHOP's integration of its recent acquisition, Applebee's. Comps for fiscal 2007 rose 2.2% at the IHOP chain, yet the new purchase reported same-stores sales falling 2.2% for the year. Acquisitions and turnarounds are always risky endeavors, and with IHOP you get both.

The company does have the benefit of CEO Julia Stewart's leadership. She has the IHOP turnaround under her belt. This restores some confidence, but there is still no guarantee of success. One of my favorite stocks, McDonald's (NYSE: MCD), can boast some of the industry's best management prowess, yet I've seen its investment in Boston Chicken take flight like, well, a chicken, while Chipotle Mexican Grill is fueled by hot sauce.

Got an appetite for risk?
While IHOP will certainly generate cash by franchising company-owned restaurants and selling real estate, the real question in investors' minds is how successfully -- and quickly -- it can bring Applebee's back to "Favorite Neighbor" status. Higher commodity and fuel prices are raising costs for restaurants while keeping budget-conscious customers from eating out as frequently.

Those watching IHOP are waiting for a change in Applebee's results. Until it happens, these shares won't get much of a spark under them. In fact, there's a very real risk that same-store sales at the namesake chain will disappoint, which will only bring further negativity to the shares.

My McDonald's shares just lost nearly 7% of their value on Friday over consumer-spending fears. If a company that has operated flawlessly over the past few years can't escape the pessimism, I don't expect IHOP can either. 

Restaurant stocks are heating up the griddle in 2008:

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