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.
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.
2 comments:
So do you think Starbucks is a better investing option ?
SBUX is better (less risky) than DENN, but SBUX has dropped more than 10% in the last 3 months and even after reporting a great last quarter I haven't seen the upward trend as yet. I like SBUX and I think it is good but only if your money is in it for the long term. For short term gains I just don't like the restaurant industry.
Post a Comment