Is Applebee's Rotten?

Here at the Fool, we usually pay little attention to the upgrades, downgrades, and price target changes that regularly emanate from Wall Street analysts. But when a stock gets a rare "sell" rating, it can catch our attention. That happened today, when a Banc of America analyst downgraded four restaurant stocks, slapping an especially dire "sell" rating on Applebee's (Nasdaq: APPB  ) .

The bearish sentiment extended to Ruby Tuesday (NYSE: RI  ) , Brinker (NYSE: EAT  ) , which runs Chili's and other restaurant chains, and Texas Roadhouse (Nasdaq: TXRH  ) , all of which received neutral ratings.

I'm just about neutral myself on Ruby Tuesday, Brinker International, and Texas Roadhouse; I don't follow them too closely, so I have little opinion on them. According to current conventional wisdom, many casual dining chains may have a tough time in the coming year, with consumers weighed down by economic factors like gasoline prices and the real estate market, along with increased awareness of the perils of trans fats. However, that speculation doesn't speak to the viability of those specific restaurants for very long-term investors.

However, I have to say I agree with the bearish sentiment regarding Applebee's. It's had a very difficult time lately, one well-tracked by the Fool in 2006. (Its 2005 was no walk in the park, either.) Management's strategy has suffered serious misses, earning shareholders' ire. Activist shareholder Breeden Capital Management recently started making some noise, nominating four candidates for Applebee's board of directors, citing the company's "severe performance problems" (and a "disregard" for shareholders, among many other fighting words).

Such activist stockholders shouldn't be underestimated. Among other firms, their agitations have recently made a difference at Wendy's (NYSE: WEN  ) , which agreed to spin off Tim Hortons (NYSE: THI  ) .

Applebee's has struggled for so long, yet it seems to me that even more challenges lie in wait for the company. It has to get itself back on track while facing pressure from Breeden. Given its current woes, that recovery might take a while, and investor opinion of Applebee's seems none too positive. In our community intelligence database, Motley Fool CAPS, Applebee's is just a one-star stock, with nearly half of the All-Star players who have rated the stock believing it will underperform.

In my opinion, ignoring that negative sentiment could be risky. Given Applebee's performance over the last couple of years, and the uphill battle it will have to make to right its ship, Applebee's shareholders should contemplate whether it can turn itself around anytime soon, and if so, whether it will be worth the wait.

Take a bite out of Tom Gardner and Bill Mann's bushel of promising, small-cap companies with a free 30-day trial subscription toMotley Fool Hidden Gems.

Alyce Lomax does not own shares of any of the companies mentioned.

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