What Investors Need to Know Before Investing in Denny’s Stock

DENN may be cheap but it is still a big risk

Jul 1, 2022 at 1:57 PM

DENN

Denny's Corporation (NASDAQ:DENN) is an American table service diner-style restaurant chain. DENN franchises and operates one of America's largest franchised full-service restaurant chains, based on the number of restaurants featuring 1,634 franchised, licensed, and company restaurants around the world including 153 restaurants in Canada, Puerto Rico, Mexico, the Philippines, New Zealand, Honduras, the United Arab Emirates, Costa Rica, Guam, Guatemala, El Salvador, Indonesia, and the United Kingdom.

Denny’s stock price has decreased approximately 45% year-over-year and DENN is currently trading down 49% since reaching its 52-week high of $17.40 in October. Additionally, shares of DENN have dropped in price 44% year-to-date and are down 13% just over the past month. Denny's stock has recovered just 6% since bottoming at a 52-week low of $8.46 earlier this month on June 16.

Given their expectations for the coming years, Denny's stock now provides a fair valuation at a forward price-earnings ratio of 15.22 and a price-sales ratio of 1.41. DENN is estimated to end fiscal 2022 with 10.7% revenue growth and 16% earnings growth. In addition, the restaurant chain is expected to increase their revenues and earnings by 2% and 19% respectively for fiscal 2023, making Denny's stock best suited for value investors looking to capitalize on its recent bearish form this past year.

Still, investing in this restaurant stock comes with a high level of risk. DENN currently owes $345.01 million in total debt, which is significantly more than half the company’s market cap of $551 million. Denny’s also holds just $9.78 million in cash on their balance sheet, which will undoubtedly limit their long-term growth potential. The restaurant chain has already demonstrated an inconsistent growth rate in previous years, reporting back-to-back years of revenue declines between fiscal 2018 and fiscal 2020, amounting to a 54% decrease. Overall, the risk-reward ratio is simply not attractive enough at Denny's stock's current pricing.

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