Denny's Stock Shows Every Sign Of Being Significantly Overvalued
- By GF Value
The stock of Denny's (NAS:DENN, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $18.15 per share and the market cap of $1.2 billion, Denny's stock appears to be significantly overvalued. GF Value for Denny's is shown in the chart below.
Because Denny's is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Denny's has a cash-to-debt ratio of 0.02, which is in the bottom 10% of the companies in Restaurants industry. The overall financial strength of Denny's is 3 out of 10, which indicates that the financial strength of Denny's is poor. This is the debt and cash of Denny's over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Denny's has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $288.6 million and loss of $0.11 a share. Its operating margin of 2.94% better than 70% of the companies in Restaurants industry. Overall, GuruFocus ranks Denny's's profitability as fair. This is the revenue and net income of Denny's over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Denny's is -14.2%, which ranks worse than 88% of the companies in Restaurants industry. The 3-year average EBITDA growth rate is -32.6%, which ranks worse than 88% of the companies in Restaurants industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Denny's's ROIC was 1.39, while its WACC came in at 10.33. The historical ROIC vs WACC comparison of Denny's is shown below:
In closing, the stock of Denny's (NAS:DENN, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 88% of the companies in Restaurants industry. To learn more about Denny's stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
