Why Raymond James Is Upgrading Red Robin, Dine Brands

The restaurant industry suffered a step back in late 2020 due to rising COVID-19 infection rates, but Raymond James analysts said they are "optimistic" that conditions will improve in the coming months.

The Analyst: Brian Vaccaro upgraded Red Robin Gourmet Burgers, Inc. RRGB from Market Perform to Outperform with a new $26 price target.

The analyst upgraded Dine Brands Global Inc DIN from Market Perform to Outperform with a new $75 price target.

The Restaurant Industry Thesis: Restaurant industry trends started to weaken in mid-November as multiple cities and states forced new dine-in restrictions amid worsening COVID-19 infection rates, Vaccaro said in an industrywide note.

Casual dining restaurants as a whole likely saw a 20% drop in comps in November, while December comps worsened into the mid-to-upper 20s range, the analyst said. 

Conditions are likely to improve at the end of the first quarter and could pick up momentum in the back half of 2021, he said.

This assumes a successful vaccine distribution, and this will be the primary driver of restaurant stock performance this year, Vaccaro said. 

Related Link: McDonald's Offers The Most Visible Top-Line Growth Story In Fast Food, Analyst Says

The Red Robin Thesis: The bullish case for Red Robin's stock includes the following, the analyst said:

1) A $49-million tax refund eliminates any near-term liquidity concern, as the company has access to $146 million in capital.

2) The stock's "depressed valuation" of four times 2022E EV/EBITDA offsets below average near-term sales visibility. 

3) Post-COVID EBIT margins could exceed pre-COVID levels due to recent successful cost-saving initiatives.

The Dine Brands Thesis: The bullish case for IHOP and Applebee's parent company is justified after the stock's 15% pullback from its early December highs, Vaccaro said in the upgrade note.

Specifically, the stock is trading below 10 times EBITDA on 2022 estimates, and this represents an "attractive entry point" for a 100% franchised restaurant model, the analyst said. 

Looking forward, expectations for restaurant closures have eased, as the second round of PPP funding will help franchisees keep their doors open until demand returns amid a successful vaccine distribution.

Price Action: Shares of Red Robin were trading higher by more than 8% Wednesday morning at $21.84, while shares of Dine Brands were higher by 8.59% at $66.88.