Denny’s Serves Up Grand-Slam Returns

We all know that McDonalds Corporation (MCD) is the reigning king of the fast food sector and one of the top performers over the past decade, based on my stock analysis.

In fact, my analysis suggests that McDonalds’ rivals are trying to emulate what is working at the company rather than compete against the seller of the iconic “Big Mac.” Burger King Worldwide, Inc. (BKW) may be pursuing a similar strategy to McDonalds’ by diversifying its menu offering with new items and value-conscious options.

Yet while Wall Street focuses on McDonalds and its burger-oriented rivals, my analysis reveals that a stock that I feel offers better valuation and potential upside is Denny’s Corporation (DENN). With a market-cap of $552 million, Denny’s is dwarfed by the $102-billion market cap of McDonalds, but that doesn’t mean there isn’t a buying opportunity with Denny’s.

In fact, Denny’s is up 50% over the past 52 weeks and has easily outperformed the S&P 500’s advance of 26.8% and McDonalds’ 11.8% gain, according to my technical analysis.

Chart courtesy of www.StockCharts.com
Denny’s is best known for its “Grand Slam” breakfast offerings. The company has gone through a major structural reorganization in which it sold many of its stores to franchisors, thereby reducing its own operating costs and collecting fees instead. As of March 27, 2013, 1,525 of the company’s 1,689 restaurants were franchised. The end results have been stronger operating numbers and a steady rise in the company’s share price, according to my stock analysis.

About 98 restaurants are situated in Canada, Costa Rica, Mexico, Honduras, Guam, Curacao, Puerto Rico, Dominican Republic, and New Zealand.

And in an aggressive and bold move, Denny’s has been looking at expanding into the highly competitive Chinese market, where the top players are McDonalds and YUM! Brands, Inc. (YUM) -- owner of the Kentucky Fried Chicken and Taco Bell brands. The company’s deal with Great China International Group was recently cancelled, likely due to some poor results from the top players in China, based on my stock analysis.
On the operations end, Denny’s reported adjusted earnings of $0.08 per diluted share in its first-quarter earnings season, up 48.4% year-over-year and a penny above the Thomson Financial consensus earnings-per-share (EPS) estimates. It was the third straight quarter of outperformance.
On a comparative valuation basis, Denny’s trades at 1.16X trailing sales and has a price-to-earnings-growth (PEG) ratio of 0.92, versus 3.71X sales and a PEG ratio of 2.04 for McDonalds.

Now, don’t get me wrong; I still believe McDonalds will continue to be the top player in the restaurant and fast-foods sector going forward. (Read, The Secret to Success in the Fast Food Sector.) But for some added potential, a small-cap such as Denny’s makes sense for the aggressive investor, based on my stock analysis.