Over the past six months, Dine Brands’s stock price fell to $23.61. Shareholders have lost 11.5% of their capital, which is disappointing considering the S&P 500 has climbed by 5.2%. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Dine Brands, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Dine Brands Will Underperform?

Despite the more favorable entry price, we're swiping left on Dine Brands for now. Here are three reasons why DIN doesn't excite us and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

Dine Brands’s demand has been shrinking over the last two years as its same-store sales have averaged 1.8% annual declines.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Dine Brands, its EPS declined by 10.1% annually over the last six years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Dine Brands’s $1.64 billion of debt exceeds the $186.5 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $233.7 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Dine Brands could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Dine Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We see the value of companies helping consumers, but in the case of Dine Brands, we’re out. After the recent drawdown, the stock trades at 4.6× forward P/E (or $23.61 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at one of our top digital advertising picks.

Stocks We Would Buy Instead of Dine Brands

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