Tuesday’s Top Upgrades (and Downgrades): Denny’s Corporation (DENN)

Denny’s no grand slam, either
Could Denny’s be that “better” stock prospect? Maybe. This morning, analysts at Feltl & Co. downgraded Denny’s to “hold,” but if you ask me, the numbers show this stock may have potential.

Denny’s sports an unbelievable 5.0 trailing P/E ratio. Its forward P/E is 16.5, and probably a more accurate representation of the stock’s true price. Free cash flow supports this view, inasmuch as Denny’s is considerably weaker on FCF than it is on net income, reporting “earnings” of $108 million over the past year, but only $46 million in free cash.

That said, if you ding Denny’s for its weak free cash flow, and penalize it further for its heavy debt load ($172 million net of cash), the stock’s valuation still comes out to just over 15 times FCF. With analysts estimating 18% long-term annualized profits growth for the stock, that still suggests the stock is selling for a discount, even after running up 35% over the past year.

Granted, achieving and maintaining an 18% growth rate is a very tall order for Denny’s. But if it can make it happen, the stock’s price today really is as cheap as it seems — and Feltl is wrong to downgrade it.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Tuesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.