We came across a bullish thesis on Dine Brands Global, Inc. (DIN) on Substack by Matt Newell. In this article, we will summarize the bulls’ thesis on DIN. Dine Brands Global, Inc. (DIN)’s share was trading at $25.33 as of March 18th. DIN’s trailing and forward P/E were 6 and 4.72 respectively according to Yahoo Finance.
An employee serving a customer at a dine-in Fast Casual Restaurant.
Dine Brands is the type of company that investors tend to overlook. Its brands, Applebee’s and IHOP, are familiar but unexciting, and its growth prospects appear limited. However, beneath this mundane exterior lies a solid asset-light business that generates consistent cash flow. The company’s franchise model ensures stable owner earnings of around $80 million per year, and despite a lack of growth momentum, the valuation disconnect presents an interesting opportunity. With the 10-year Treasury yield at 4.4%, a private owner would likely value Dine at no less than $800 million, possibly more. However, the market’s current preference for high-growth stocks has left Dine trading at just $400 million, creating a compelling asymmetry in risk and reward.
The company does have its challenges. The current CEO, John Peyton, has a background in consulting and marketing, which raises concerns about strategic direction. Additionally, the company’s debt, while manageable, remains a factor to watch. However, even with these concerns, the core business remains highly resilient. At today’s valuation, investors are looking at a 20% owner earnings yield, an attractive proposition for a stable franchise business. Given the company’s predictable cash flows, a lot would have to go wrong for this investment to turn south.
Dine Brands operates as a franchisor for its two primary restaurant chains. Applebee’s, a casual dining brand, competes with the likes of Chili’s and Olive Garden, while IHOP specializes in breakfast dining, similar to Denny’s. Both brands are heavily franchised, with 97% of locations in the U.S. The company collects royalties of 4% from Applebee’s and 4.5% from IHOP, excluding advertising fees, resulting in approximately $400 million in annual franchise revenue. With franchise costs at just 10% of revenue—covering minimal centralized product supply and bad debt expenses—franchising generates roughly $360 million in gross profit. Additionally, Dine owns or leases real estate for about one-third of IHOP locations, contributing another $30 million in gross profit. After accounting for corporate overhead, the company achieves an impressive operating margin of nearly 40%.
Growth, however, remains a concern. IHOP has been relatively stable, averaging 1-2% annual restaurant growth, though COVID-19 temporarily disrupted this trajectory. Applebee’s, on the other hand, has been in decline, losing around 70 locations per year between 2016 and 2021. Though the pace has slowed in recent years, the brand still faces ongoing unit closures of around 1% per year. While management remains optimistic about stabilizing Applebee’s store count, there is little tangible evidence to support a turnaround. Same-store sales (SSS) also present uncertainty. Over the past decade, Applebee’s per-store revenue has remained stagnant, while IHOP has grown only 9.5%, well below inflation. This flat revenue trend suggests that any future valuation upside will likely come from improved efficiency rather than organic sales growth.
A potential wildcard for Dine Brands is its experiment with dual-branded locations. Applebee’s and IHOP serve different customer bases at different times of the day, creating an opportunity to share kitchen space and reduce costs. The company has already launched 13 international dual-branded locations, reporting revenue increases of 50-100% compared to standalone units. The first U.S. location recently opened in Seguin, Texas, and early results will be critical in determining whether this model can be expanded. If successful, it could meaningfully accelerate unit growth and improve same-store sales, providing a rare catalyst for re-rating. Franchisees have already expressed interest in adopting the model, with 15 additional locations planned if the Seguin pilot proves viable.
While the business itself remains stable, the biggest downside risk is management. Peyton’s leadership does not inspire confidence, particularly given his background in consulting and marketing rather than operations. Franchise businesses rely heavily on strong relationships with operators, and it remains unclear whether the current leadership team is best positioned to maximize long-term value. That said, the existing model requires minimal innovation to continue generating strong cash flows, and the potential optionality of the dual-branding strategy could offset some concerns.
At just 5x earnings, Dine Brands is undeniably cheap. The real question is whether that discount is enough to compensate for management’s missteps and capital allocation concerns. Right now, it doesn’t feel like a Buffett-style “fat pitch,” but the presence of three embedded call options—multi-branded expansion, an aggressive buyback program, and potential leadership change—adds meaningful upside. If any of these catalysts materialize and the market fails to properly reprice the business, the opportunity becomes significantly more attractive.
Dine Brands Global, Inc. (DIN) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 29 hedge fund portfolios held DIN at the end of the fourth quarter which was 23 in the previous quarter. While we acknowledge the risk and potential of DIN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DIN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.