Applebee's Parent Dine Brands Downgraded By Raymond James After 30% Rally

Shares of Applebee’s and IHOP parent Dine Brands Global, Inc. DIN have surged roughly 30 percent in the past month, leading Raymond James to adjust its stance on the stock. 

The Analyst

Raymond James analyst Brian Vaccaro downgraded Dine Brands from Strong Buy to Outperform and increased the target price from $92.50 to $108.

The Thesis

The rally reflects growing optimism in Applebee’s conservative comp estimates, as well as improved industry trends and short covering, Vaccaro said in the Monday upgrade note. (See his track record here.) 

Despite the downgrade, Vaccaro said Dine Brands has a “higher probability for further upside" for the following reasons:

The analyst remains optimistic that Applebee’s can sustain positive comps in the fourth quarter despite lapping more difficult year-over-year comparisons.

A belief that the stock’s discount valuation will continue to normalize vs. highly franchised peers.

In terms of Applebee’s comp outlook, Vaccaro said the results should remain positive, supported by accelerated growth, continued alcoholic beverage and food offers and three- and four-year stacked comps.

“We’d also note that monthly comps could be volatile in Q4, as we believe the [fourth-quarter 2017] comp gain of 1.3 percent reflected a particularly strong October (launched Dollarita) followed by easier comparisons in November [and] December,” the analyst said. 

RHM, Applebee’s second largest franchisee, filed a reorganization plan following a Chapter 11 filing in May. The plan is contingent on a court ruling this month that will determine if Applebee’s franchise agreements were terminated before the bankruptcy filing, Vaccaro said. 

“If so, terms of the Applebee’s franchise agreement seem to dictate that the company has the right to acquire RMH’s units at fair value (which we assume would be followed by it refranchising those units to new/existing franchisees)."

All franchisees were making royalty payments on time as of July, and the RMH situation does not create a material overhang for Dine Brands stock, according to Raymond James. 

Price Action

Dine Brands shares were trading down 5.45 percent to $86.68 at the time of publication Monday. 

Related Links:

Analyst: 3 Reasons The Operator Of Applebee's And IHOP Is Now A Buy

IHOP Goes 'International House Of Burgers' To Cater To Later Diners

Photo by Afl2784/Wikimedia.