Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

DineEquity Inc (DIN), Sonic Corporation (SONC), Red Robin Gourmet Burgers, Inc. (RRGB): 3 Restaurants for Your Watchlist

Sometimes, you can find good investment ideas by looking at the myriad of restaurants in your neighborhood. They may not all rank with huge global restaurant chains such as McDonald’s Corporation (NYSE:MCD); however, they may still be worth some of your research time. The three restaurant chains below reside in a turnaround situation that can profit the long-term shareholder.

From pancakes and steaks

Full service restaurant chain DineEquity Inc (NYSE:DIN) and its franchisees operate Applebee’s and the International House of Pancakes, or IHOP.

The company stands just shy of completing a move toward a 100% franchised system, a process that began five years ago. Last year, the company sold 154 IHOPs and Applebee’s each to franchisees, sacrificing short-term revenue for long-term gains in profit margins with franchisees doing most of the heavy lifting in terms of overhead.

DineEquity Inc (NYSE:DIN)’s revenue and free cash flow declined 21% and 62%, respectively, due to the significantly lower number of stores owned by the company. However, its net profit margins doubled from 7% in 2011 to 14% in 2012.

DineEquity Inc (NYSE:DIN) made strides in improving its balance sheet. Cash to stockholder’s equity stands at 21%. Its long-term debt to equity ratio stands at a monstrous 389%; however, DineEquity paid its long-term debt down $200 million last year.

With the future depending so much on its franchisees, it established a purchasing cooperative where the company’s franchisees can participate in the purchasing power of the company’s more than 3,600 restaurants. This better enables it to profitably sell to restaurant patrons at a value price.

DineEquity Inc (NYSE:DIN)Look for DineEquity Inc (NYSE:DIN) to finish its move to 100% franchisee ownership by selling its remaining company-owned stores. In addition, its efforts to pay down debt won’t hurt either. DineEquity still has plenty of room to grow outside of the United States. Right now, the count of Applebee’s and IHOPs stand at 149 and 44, respectively, in the international arena.

The drive-in chain

National drive-in chain Sonic Corporation (NASDAQ:SONC) sells hamburgers, hot dogs, and ice cream. This chain probably appeals to you on a nostalgic level. Pulling into one of those drive-ins certainly provides an experience difficult to find elsewhere.

In recent years, Sonic Corporation (NASDAQ:SONC) experienced difficulty with product quality and the lack of a uniform national marketing campaign. The company made moves to invest in its national marketing efforts and improve product quality. Moreover, like DineEquity Inc (NYSE:DIN), Sonic is moving more to a franchised system and paying down debt. In addition, Sonic wants to build smaller store formats to better attract franchisees and to expand into smaller markets that wouldn’t necessarily support a larger restaurant.

In 2012, Sonic Corporation (NASDAQ:SONC)’s revenue declined 41 basis points due to the re-franchising of 34 restaurants. Its free cash flow increased 17%. Long-term debt declined 3% last year, but still comprises 788% of stockholder’s equity.

The company still needs to pay down significant amounts of debt before achieving a decent margin of safety. Last year, operating income only exceeded interest expense three times. A good rule of thumb calls for at least five times interest expense.

Sonic Corporation (NASDAQ:SONC)’s investment in marketing, product quality, and a smaller store format may prove beneficial to the company and its shareholders.

Hamburger deluxe

Casual dining chain Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) defines itself on a pleasant dining experience. Interestingly, “Unbridled Acts” serves as part of the company’s culture where company employees can delight the customer with random acts of kindness.

Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) sports the strongest fundamentals of the three companies discussed here. The company’s revenue increased 7% last year. However, its free cash flow declined 34%, stemming from lower operating cash flow and higher capital expenditures.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.