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Is it time to nibble on DineEquity (DIN)?



December 17, 2012 – Comments (2) | RELATED TICKERS: DIN

Hi everyone.  This weekend I came across another interesting stock.  I like the potential special situation-esque catalyst that exists, but I really don't like the company's product.  So, I'm not sure what to do with this one yet.  This pick comes to us courtesy of one of my new favorite special situation / activist investors, Marcato Capital Management. The company's head honcho Mick McGuire, a former employee of Bill Ackmann at Pershing Square, had presented some outstanding ideas lately.

I've been following his moves fairly closely lately, but I haven't been able to determine the reason for why he has established an activist position in DineEquity (DIN). As someone who doesn't just blindly follow the picks of other super investors, but rather wants to know the thesis behind their investments, I haven't picked up any of DIN in CAPS yet.

For those of you who aren't familiar with DineEquity, it owns the restaurant chains Applebee's and IHOP. I'm not snooty in my food taste, I like an inexpensive meal as much as the next guy.  I'll take some good BBQ and a cold beer or some nice Thai food any day of the week and they're not expensive, but I definitely am not a big fan of either of these restaurants. Regardless of personal taste, tons of people go to them.

Courtesy of this week's 13F article in Barron's I know see why he has established a position in DIN. DineEquity is a cheap cash-flow machine now that it has franchised the majority of its company-owned stores. It appears as though Mr. McGuire wants DIN to use the stream of cash that it has coming in to establish a dividend. According to Barron's:

"$96: assuming a 5% dividend yield, the share price DIN would trade at if it paid out a regular dividend of 80% of its $6-per-share free cash flow."

This compares to a stock price today of slightly over $50/share, even after a strong run in the stock.

A cheap stock with a potential catalyst. Marcato Capital Management has made had a number of successful activist investments lately. I like the upside here and am adding it to my CAPS picks.


2 Comments – Post Your Own

#1) On December 17, 2012 at 1:05 PM, constructive (99.97) wrote:

I don't trust any company that has "equity" in their name. DIN is a good example since tangible equity is negative!

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#2) On December 17, 2012 at 1:47 PM, constructive (99.97) wrote:

By the way, I noticed your pick of BX earlier this year. BX has underperformed the past few years, but I like the looks of KKR at 1.9x tangible equity, Carlyle at 1.7x and Apollo at 0.9x.

All the big PE firms have 20-30% IRRs over the past 20-30 years. Of course, if they had been public I don't know to what extent shareholders would have participated in those gains.

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