DineEquity (DIN) reported fourth quarter figures this week as well as a new capital allocation strategy. Essentially management plans to put all of the company's future Free Cash Flow into the hands of shareholders. DineEquity, franchisor of over 1,800 Applebee's restaurants and over 1,500 IHOP restaurants, is one of the largest full service franchise restaurant operators in the world. Since the acquisition of Applebee's in 2007, the company has been selling off owned Applebee's restaurants, converting to a pure franchisor of their restaurants (99% as of end of December).
As I will explain, the franchisor model is far more attractive than owning/operating restaurants. Margins are higher, operating leverage non-existent, fees quite stable, and capital expenditure needs are extremely low. In fact, zero capex is required for growth. It's on the franchisee's dime.
Indeed, these businesses should and do trade at premium multiples. In a wild day of trading post earnings, DIN closed around $72, which implies a 6.2% FCF yield and a 4.2% dividend yield, reasonably attractive compared to peers at roughly 5% FCF yields.
Basics
Overview
DineEquity franchises and operates 1,581 IHOP restaurants, as well as 2,034 Applebee's Neighborhood Bar & Grill restaurants. As of the end of December, 99% of their restaurants were franchised. Here is a slide from last year illustrating the company's gradual conversion to a fully franchised business. Out of its 3600 restaurants, the company intends to keep only 23 owned Applebee's and 10 owned IHOPs in order to test new products, enhance operations and improve technology.
(click to enlarge)
DineEquity has generated tons of FCF too:
(click to enlarge)
Last year, DIN threw off $107mm of FCF (defined as EBITDA less interest, less taxes and capex).
Performance
In 2012, the Applebee's chain generated 1.2% same-store sales, down from 2.0% in 2011. The IHOP side suffered a touch with a decline in same-store sales of 1.6% in 2012. The Q4 trend was a little better at IHOP, and a little worse at Applebee's, and overall the company is forecasting flat SSS for 2013, give or take 1.5% for both chains.
EBITDA guidance was frankly a disappointment, but in all likelihood I think management erred on the side of caution here. With the last of the Applebee's stores sold in Q4, investors finally got a glimpse of the EBITDA and Cash Flow potential of the company.
In fact, here are the segment details for Q4 to get a sense for how the company will look as a pure franchisor. Clearly, most of DIN's EBITDA will come from franchising, with some rental earnings on the IHOP side. The financing segment generates fees by financing franchise costs and restaurant equipment.
(click to enlarge)
2013 EBITDA and FCF
With $99.3mm of EBITDA in Q4, the pre-SG&A run-rate EBITDA figures annualizes to $397mm. Subtracting out $145.5mm of SG&A guidance for 2013 implies roughly $252 of run-rate EBITDA.
Now, based on the midpoint of management's actual guidance I computed $254mm of EBITDA for 2013, which I take to be quite conservative given the fact that management plans to franchise 45 new Applebee's (2.2% growth) and 55 new IHOPs (3.5% growth). Closings might knock off 1% of the growth in openings, but overall it seems 2% store growth with 1-2% growth in SSS is quite doable. That would equate to 3-4% growth in revenue and EBITDA in 2013, far better than what management seems to be forecasting.
On a Cash Flow basis, management guidance again seemed a tad light, with a range of CF from Ops between $88 to $102mm, and capex guidance of $8 to $10mm. A higher tax rate impacted this a bit along with their flattish EBITDA guidance. That equals FCF of $80mm to $92mm, or $4.15 to $4.77 per share. Given this is a heavy free cash flow business model that requires zero capital to grow, management initiated a $3.00 annual dividend, the first 75c of which will be paid at the end of March.
Working backwards from the company's CF from Ops guidance, I get $249 to $265 of expected EBITDA, which is pretty close to the company's EBITDA midpoint ($254mm).
On an EPS basis, DIN reported $4.28 in adjusted earnings for 2012. 2013 Street estimates right now are $4.17, slightly lower given that the company has been selling restaurants. When DIN sells a company-owned restaurant, it of course gives up the EBITDA from that restaurant, and converts it to a franchised store whereby it collects 4% of the revenue. So, while EPS is lower in 2013 vs. 2012, on a go-forward basis, post asset sales, the company should resume a modest growth trajectory.
Leverage
DineEquity today is 4.6x leveraged on a debt/EBITDA basis. Bank debt covenants were relaxed last month, providing the capability to pay out dividends as long as leverage remains below 5.25x. The interest rate on their bank debt was also reduced to 3.75% from 4.25%. Restaurant sale proceeds plus FCF over the past year have been used to pay down debt, with total debt paydowns of $333mm in 2012.
While a mature, low growth business may not sound exciting, the good news is that FCF should jump quite a bit by late next year. I expect that the company will refinance its 9.5% of 2018 bonds, which are callable in October 2014. Today they trade at a 4.5% yield, and assuming the company can refi them at a 6% yield (on a 10-year basis) would reduce interest expense by $26mm per year.
On a pro forma basis, assuming the bonds were refi'd in early 2014, here is what the FCF would look like compared to 2013 guidance:
FCF of $5.96 per share would provide substantial capacity to increase the dividend from its current $3.00 per share. Again, this is admittedly not quite accurate given that the bonds are not callable until October, but is intended to illustrate what end of year 2014, and 2015 FCF could look like. Note that I did reduce the share count somewhat for buybacks in the right column.
Dividends
Investors should also understand that the 9.5% bond indenture limits dividends via a "Restricted Payments" test. According to management, that test limits restricted payments (i.e. dividends/share buybacks) to $85mm as of today. With a $100mm share buyback in place and a $3.00/share dividend (which totals $58mm), essentially buybacks will be limited to $85 less the $58 in dividends, or $27mm this year.
The banks also limit dividends to the extent that Debt/EBITDA exceeds 5.25x. Using 2013 guidance, it seems that leverage today is exactly at that threshold. So, FCF can be used for buybacks and dividends, but the company does not intend to borrow under its revolver to fund additional share buybacks. Risk of course is that EBITDA falls, meaning perhaps some FCF would have to be diverted to paying down banks.
Valuation
Here are the best comps, restaurant franchisors:
(click to enlarge)
DineEquity appears reasonably close on a P/E basis to its peers, but over 200 bps wider on a FCF basis.
I also stole these comps from Marcato, who is an activist with a fairly large stake in DIN. The names below are owner/operators of restaurants, generally names that should trade wider (i.e. at lower multiples). My math, by the way, on a FCF-basis indicates that the restaurant group below trades at a 5.76% FCF yield on average.
(click to enlarge)
Taking a 5% FCF yield on DineEquity gets me an $89 valuation using 2013 figures, and using 2015 FCF/share of $5.96, gets me $119/share, or upside of 65% pre-dividends. 5% is still a higher FCF yield than the comps by nearly 1%. Downside could be the low 60s, which seemingly would equate to a pound the table buy price assuming EBITDA has remained relatively stable.
On that note, understand that a franchisor business is purely fee-driven. Think of franchise fees as a royalty stream, requiring limited operations or capital. To give an example, a 5% hit to same-store sales would merely impact EBITDA here by 4% (as rental/finance revenue wouldn't change likely). An operator of a restaurant would suffer far more in a down 5% scenario. Inflation is a huge positive for franchisors too, as price increases flow directly back to DIN in the form of higher fees.
Conclusion
2013 guidance was admittedly a disappointment, and while the market digests this, I recommend perhaps waiting for a better entry point. This is a solid business to own at the right price, however. Keep it on your screen. With almost $6 in FCF per share expected by 2015, I think the initial $3.00 annual dividend is a conservative start, one with lots of potential to grow.
Perhaps in 18-24 months, a $4 dividend at a 4% yield would equate to a $100 stock. Near term, the catalyst of announcing a new capital allocation strategy is unfortunately over. Hedge funds may decide to sell the news and reduce exposure. A struggling consumer facing higher marginal taxes isn't encouraging either (see Darden and McDonald's same-store comps in January). This consumer tightness seemed to be a theme on the conference call too. I sense comp weakness in Q1.
As far as DIN's stock goes, I wouldn't be surprised to see this float down to the mid-60s. At that point, I plan to make my current small position much bigger, with a risk-reward of $5-10 down, and $30-50 up over the long term.
Disclosure: I am long DIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
weather forecast national weather service weather channel Rivals beyonce Kaepernick Eddie Vanderdoes
?Print Friendly 
Dear Lifehacker,
If your laptop or smartphone was stolen, you can use a service like Gmail or Dropbox to find the IP address of your thief. When you log into those services from any computer, it logs the IP address used, and displays your last used IP in your account. In Gmail, it's in the bottom right-hand corner under "Details," and in Dropbox, it's in Settings > Security under the details of each individual computer. If the thief used your computer, the last logged IP address may be theirs instead of yours. Again, though, if they're smart, they didn't use your computer and this trick won't work.
If you have an Android phone running 2.3 or lower, previously mentioned Plan B is a pretty cool option. You can install it remotely from the Google Play web interface, after which it will start tracking your phone. However, if your thief has turned off the device, turned off internet connectivity, or wiped your phone, you're completely out of luck, and have no way of tracking it.