Thumbs down for Denny's

Denny's, America's family-style restaurant chain is traded on NASDAQ under the symbol of DENN and in my opinion, currently it must be AVOIDED.

A good product can be a good enough reason to want to invest in any company, but Denny's is an exception. I love their pancakes and I appreciate the free flow of coffee, but my liking for Denny's ends after I kill my mid-night hunger. The main reasons why I advise staying away from Denny's are its weak balance sheet and low profit margins.

The restaurant industry is a very mature and a highly competitive business with a low barrier for entry. In such industries, the more cash flexibility a company has, the more it can expand and grow. Though Denny's has demonstrated healthy growth in earnings and sales in 2006 compared to 2005 (230% increase in net income, 220% increase in earnings per share and 1.42% increase in sales), it still has negative net worth. Negative net worth (assets < liabilities) implies that Denny's has less cash on hands, thus less flexibility in spending, and this in effect limits its growth. Though the Denny's management has lowered its debt by approximately 100 million or 18% in the fiscal year of 2006 by closing underperforming stores and by restructuring its business, it still has a long way to go. Denny's has almost no liquidity and its asset to debt ratio is lower than most of its competitors in the industry such as McDonald’s Corp. (MCD). Denny's current ratio is approximately 0.46 and its quick ratio is approximately 0.40 as compared to MCD which has a current ratio of 1.27 and a quick ratio of 1.24.

In addition to a huge debt, Denny's also has very low profit margins. For the quarter ending September 2006, Denny's gross profit margin was 19% and its net profit margin was 9.8%, which is very low compared to its competitors in the industry such as MCD. In the same period MCD had a gross profit margin of 38% and a net profit margin of 14%. Low profit margins imply that even though Denny's is increasing its earnings it is not able to generate much profit and does not have a competitive edge over others in the industry.

Bottom line, Denny's debt-laden balance sheet and low profit margins make it an unattractive and speculative investment option. So investors don't gamble and say NO to DENN.

The Smokin' Altria

Altria Group Inc., the smoke giant is traded on NYSE under the symbol of MO and in my opinion currently it is a BIG BUY.

Altria is liked primarily as an income-oriented value stock for conservative investing. Altria is supported by a huge dividend yield of 3.9%. Its P/E ratio is approximately 16.4, which is comparable to the industrial average and is lower than the S&P 500 average. Also, ß (a volatility measure) for Altria is equal to 0.78, which means that MO stock prices are less volatile than the market as a whole. But other than being a good dividend-yielding and low-risk value stock there is one more thing going right for Altria. I personally like Altria, because I think it can now grow.

Altria Group is the parent company of Kraft Foods (engaged in manufacturing and sale of packaged foods and beverages), Philip Morris USA and Philip Morris International (mainly involved in manufacturing and sale of cigarettes). Altria's management realizes that splitting its business into Kraft Foods, domestic tobacco and international tobacco would be beneficial, but it hasn't been able to restructure its business until now because of unfavorable litigation environment. Though it is common sense to avoid litigation prone and politically influenced industries such as tobacco, things look different now. The good news for 2007 is that the litigation prone Altria's involvement in lawsuits is now running low, allowing the management to carry out their restructuring plan. Because of this, Altria is enjoying loads of positive attention from the Street analysts who believe that Altria's restructuring will change the look of the cigarette industry.

Also, Altria is very committed in growing its business by continuously innovating and introducing new products in the market. The current growth trend in the smoking world is "smokeless tobacco" and Altria is one of the primary players along with Reynolds American (RAI). Currently, Phillip Morris USA is test marketing its smokeless tobacco product called "Taboka" in Indianapolis region and will look to introduce it nationally in the near future. I believe this will be huge for Altria as more and more people with increased awareness of the hazards of smoking will be switching to smokeless-tobacco.

Bottom line, Altria is currently one of the top value stocks with high dividend yield, low risk and bright growth prospects. I believe Altria is all set to deliver a good year. So, investors BUY MO and enjoy 2007. In my opinion it should make your life smokin' green.