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Introduction

Denny's (NASDAQ:DENN) is one of the most successful diners in America. I believe that the company will generate fantastic yields for investors in the years ahead.

Qualitative Analysis

Source: Information pertaining to Denny's came from the shareholder annual report

Currently Denny's operates 1,685 restaurants, of which 88% are franchised and 12% are company owned and operated. Denny's restaurants are open 24/7 and offer a breakfast, lunch and dinner selection of food. Denny's product offerings are affordable, with unit prices ranging from $2-8 in their value menu. Denny's continues to sell their company-owned stores to franchisees while focusing on its role as franchiser.

(click to enlarge)

In summary, Denny's is likely to grow their earnings at very fast rates as they continue their licensing model, while limiting the risk from owning and operating Denny's restaurants. During 2011, Denny's signed 50 operating agreements to open Denny's in international markets; the five that were already opened are located in Honduras, Costa Rica, New Zealand and Canada. International growth with a shift to a licensing model is likely to improve growth, and reduce risk.

The company aggressively competes for market share against larger competitors. Competition includes but is not limited to: McDonald's (NYSE:MCD), Yum Brands (NYSE:YUM), Tim Hortons (NYSE:THI), Burger King (NYSE:BKW), and Darden Restaurants (NYSE:DRI).

Technical Analysis

The stock has been on a continuous up-trend since 2009, and I don't anticipate this to change any time soon.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading above the 20, 50, and 200- Day Moving Averages. DENN found support at 4.70 per share. I believe the stock is likely to trend higher on moderate volume, implying accumulation in the stock. The technical analysis supports the buy thesis.

Notable support is $3.20, 4.00, and $4.30 per share.

Notable resistance is $5.00, $5.30, and $6.00 per share.

Street Assessment

Analysts on a consensus basis have extremely high expectations for the company going forward.

Growth Est

DENN

Industry

Sector

S&P 500

Current Qtr.

40.00%

26.40%

9.60%

9.40%

Next Qtr.

16.70%

200.60%

9.90%

15.20%

This Year

3.70%

36.70%

5.10%

7.30%

Next Year

21.40%

15.60%

5.30%

13.00%

Past 5 Years (per annum)

11.16%

N/A

N/A

N/A

Next 5 Years (per annum)

19.00%

15.58%

14.14%

8.76%

Price/Earnings (avg. for comparison categories)

16.43

16.55

-6.77

14.21

PEG Ratio (avg. for comparison categories)

0.86

1.2

0.33

-0.03

Source: Table and data from Yahoo Finance

The company shows phenomenal growth as analysts on a consensus basis have a 5-year average growth rate forecast of 18.00% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

0.08

0.05

0.07

0.09

EPS Actual

0.05

0.06

0.07

0.1

Difference

-0.03

0.01

0

0.01

Surprise %

-37.50%

20.00%

0.00%

11.10%

Source: Table and data from Yahoo Finance

The average surprise percentage is -1.6% analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2006

$ 0.33

14.27

2007

$ 0.33

11.36

2008

$ 0.15

13.27

2009

$ 0.42

5.21

2010

$ 0.22

16.27

2011

$ 1.15

3.27

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows that throughout the 2007-2009 period revenues dropped, as the company was adversely affected by the Great Recession. Once the United States economy exited the recession in 2010-2011, the company's earnings have improved. The earnings figure for 2011 at $1.15 was a one-time event caused by a provision from taxes that boosted net income by $83 million.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart, we can conclude that the business is cyclical and is affected by macroeconomics. Therefore the largest risk factor to Denny's is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.

(click to enlarge)

Source: Forecast and table by Alex Cho

By 2017, I anticipate the company to generate $0.71 in earnings per share. This is because of earnings growth, improving global outlook, earnings management and continued development overseas.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Investment Strategy

DENN currently trades at $4.85. I have a price forecast of $4.77 for 2012, being that there are 10-days until December 31st; the stock already exceeds the price forecast. This means we should move to the long-run, and focus on 2013. Denny is in a long-term up-trend. The stock may rapidly jump when it announces earnings for 4th quarter 2012 in 1st quarter 2013. It is also likely that DENN will continue to appreciate up until it announces earnings.

Short Term

Over the next twelve months, the stock is likely to appreciate from $4.85 to $5.67 per share. This implies 17% upside from current levels. The price history indicates the stock is in a long-term up-trend. While the previously mentioned price forecast using fundamental analysis further supports the trade set-up.

Investors should buy Denny's at $4.85 and sell at $5.67 to pocket short-term gains of 17% in 2013.

Long Term

The company is an exceptional investment. I anticipate Denny's to deliver upon the price and earnings forecast despite the risk factors (macroeconomic, competition, etc.). Denny's primary upside catalyst is overseas growth, earnings management, and improving economic conditions. I anticipate the company to deliver upon my forecasted price target of $11.25 by 2017. This implies a return of 131% by 2017. This rate of return is exceptional, considering Denny's has a market capitalization of $454.7 million. The lack of liquidity limits this investment opportunity to smaller growth oriented investors.

Conclusion

The stock is compelling over the long and short-term. I anticipate DENN to beat the Standard and Poor 500 in 2013 (the average return from equities is approximately 12% but DENN will generate 17% in 2013). Denny's will be a great investment for many years ahead. The conclusion is simple: buy Denny's.

Source: Denny's: Your Favorite Diner Will Beat The Market