1-Star Stocks Poised to Plunge: DineEquity?

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, full-service restaurant operator DineEquity (NYSE: DIN  ) has received the dreaded one-star ranking.

With that in mind, let's take a closer look at DineEquity's business and see what CAPS investors are saying about the stock right now.

DineEquity facts

Headquarters (Founded) Glendale, Calif. (1976)
Market Cap $1.01 billion
Industry Restaurants
Trailing-12-Month Revenue $1.33 billion

Chairman/CEO Julia Stewart

CFO John Tierney

Return on Capital (Average, Past 3 Years) 6.9%
Cash/Debt $102.3 million / $2.02 billion
Competitors Brinker International (NYSE: EAT  )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 60% of the 237 members who have rated DineEquity believe the stock will underperform the S&P 500 going forward. These bears include All-Stars TDRH and JakilaTheHun, both of whom are ranked in the top 0.1% of our community.

This week, TDRH tapped DineEquity as an unsatisfying selection:

Can you make money giving away free pancakes? That said, higher gasoline prices are a direct tax from consumer discretionary income. Market is saturated, can see no silver lining in this valuation.

In fact, DineEquity's three-year average return on capital of 6.9% is much lower than that of other restaurant stocks like Brinker (10.1%), McDonald's (NYSE: MCD  ) (17.1%), and Yum! Brands (NYSE: YUM  ) (24%).

CAPS All-Star JakilaTheHun elaborates on the bear case:

Poorly run, high debt load, high interest rates, declining revenue base, not terribly profitable over the past few years, rising food prices, and aggressive valuation all coalesce to convince me to red thumb DineEquity. The transformation of Applebee's and IHOP are the biggest factors here; I remember going to IHOP in 2005 and I also remember going to IHOP in the past year. I'm not impressed by the direction. You can't even get a burger without bacon any more (which seems bizarre; especially since some people who eat beef might have prohibitions against eating pork).

But the high debt load and aggressive valuation come into play with the declining quality. ... Don't see how this could be worth more than $40.

What do you think about DineEquity, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool owns shares of Yum! Brands. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.

Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2011, at 10:21 AM, sonnyh778 wrote:

    Jakila needs to get the facts right first of all . She states you can't even get a burger at Ihop without bacon . ( Which is incorrect ) They serve one burger with bacon ground inside and one plain hamburger meat burger . The bacon burger is actually really good .

  • Report this Comment On March 04, 2011, at 11:17 AM, jojopuppyfish wrote:

    I've owned IHop for a long time and I consider Julia Sweeney a great ceo....when it was just IHOP.

    Her big mistake was not only acquiring Applebees, but an iltimed purchase.

    She bought the chain with a high debt load because she was going to sell the corporate stores to franchisees.

    IMO, there was plenty of room for IHOP to grow.

    In addition there is nothing special about Applebees. (No Moat or barrier to competition either)

    I still think she is a very competent CEO and her business plan for Applebees is delayed due to economic environment which, as it improves, so will her execution of her plan.

  • Report this Comment On March 04, 2011, at 3:28 PM, johnmc19 wrote:

    DineEquity's problem is that Julia only wants people with money to franchise stores. She is pushing out the franchisees that built Ihop and taking in franchisees that have no clue how to run restaurants. It has gotten worse with the purchase of Applebees. She only bought it to get back at the people that got rid of her when she was a VP at Applebees.

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