Stock Quotes in this Article: BOBE, CBRL, DENN, DIN

Didn't Mom used to tell you that the most important meal of the day was breakfast? Someone must have been listening, judging from how many casual dining restaurants do the majority of their business during the breakfast hours. Of course, they often also serve lunch and dinner, and some even have an all-day breakfast menu, allowing customers to heed Mom's advice at any time of the day.

What Mom probably left out was the part about which breakfast restaurants would make good investments. So let's take a look at some of the leading specialty restaurant stocks in the breakfast segment: Bob Evans Farms (BOBE), Cracker Barrel Old Country Store (CBRL), Denny’s (DENN), and DineEquity (DIN).

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Bob Evans Farms

Bob Evans Farms (BOBE) may not be a familiar name to many people. The company operates 717 Bob Evans Restaurants units in 18, concentrated in Ohio, Indiana, Michigan, Pennsylvania and Florida. Only a small fraction of the restaurants are west of the Mississippi River. Furthermore, Bob Evans operates 145 Mimi’s Cafe restaurants, concentrated in California, with 57 units, as well as in Arizona, Texas and Florida, which have a total of 34 units. Most of Mimi’s Cafes are below the Mason Dixon Line, were you to extend it westward.

Bob Evans also distributes food products under the Bob Evans and Owens branded labels. Food products account for about 18% to 20% of net sales.

Same-store sales for Bob Evans across all restaurants declined 4.3% in fiscal-year 2010. In first-quarter 2011, same-store sales declined 3.5% at Bob Evans Restaurants and 7.6% at Mimi’s.

The company has tremendous opportunity for growth through geographic expansion, yet Bob Evans opened only 1 new restaurant last year and plans only three new openings for this year, all of which are back-ended to fourth-quarter 2011. Mimi’s opened 12 new restaurants in fiscal-year 2009 and two new units in fiscal-year 2010, and it plans no new opening this year with one expected closing.

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Please note that the company’s fiscal year ends in April. Earnings are expected to decline about 9% in 2011.

Historically, this stock falls in and out of favor of momentum traders. I just can’t pay a premium for a company that is barely growing and is expected to experience earnings declines.

Denny's

Denny's (DENN) serves all-day breakfast and casual dining menus to diners at 1,600 restaurants in all 50 states in the U.S. and in Canada, Costa Rica, Guam, Mexico, New Zealand and Puerto Rico. The restaurant chain is well-known for its Grand Slam breakfast meal and has now rolled out a value menu.

Since December 2007, Denny's has used cash generated from operations to lower its long term debt from just over $350 million to around $260 million at the end of June 2010. As Denny's has shifted to a more franchise-centric operation, margins on both company-owned and franchised units have improved. New restaurant openings have increased every year since 2006.

Denny's is relying on increased advertising expenditures to improve traffic and same-store sales. The annual Super Bowl Grand Slam campaign was highly successful and is likely to retain new diners in the future. The company has a healthy backlog of franchise unit expansion. Same-store sales and earnings appear to have bottomed in 2009 and to be slowly rebounding, but they still remain firmly negative.

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Earlier this year, a group of activist shareholders launched but lost a proxy fight in order to capture board seats. The activists were successful at forcing the resignation of former CEO Nelson Marchioli, leaving Chairwoman Debra Smithart-Oglesby to assume his place on an interim basis. These dissident shareholders are not going away so easily and should remain a thorn in management’s side.

Unfortunately, Denny’s stock has not fared well during this boardroom imbroglio. However, no matter which way this plays out, I think that shareholders will benefit through lower operating costs and increased debt reduction, but it will take much patience and time for this stock to see higher ground.

DineEquity

DineEquity (DIN) is the operator of IHOP and Applebee’s restaurants. I have a great deal of respect for Chairman and CEO Julia Stewart as a restaurant operator, but I have some reservations as to her financial acumen and abilities as the chief executive of a major corporation.

The timing of the Applebee’s acquisition in late 2007 and its price of $2.1 billion have proved to be a mistake. As a result, the combined company is saddled with way too much debt for my liking.

To the company’s credit, DineEquity has managed to cut down that debt from $2.4 billion at the end of fiscal-year 2007 to $1.7 billion at the end of June 2010. Diners are returning to casual dining establishments as the economy improves, helping out the Applebee’s business. IHOP continues to increase customer awareness with its annual National Pancake Day promotion and it’s IHOP Kids Eat Free promotion in August.

In the second quarter of 2010, DineEquity reported earnings of 90 cents a share, which fell short of consensus estimates of 96 cents a share, but in mid-September, management provided an upbeat preview of its third-quarter results, noting improving sales trends. Analysts currently expect DineEquity to grow earnings by 33% to 73 cents a share for the current quarter.

Overall DineEquity may be improving, but the stock is too richly priced, it delivers uneven results, and growth will be thwarted by the debt overhang.

Also: 10 Cash-Rich Companies With No Debt

Cracker Barrel Old Country Store

If you want rockers, thin stick candies and country-fried steak with gravy and grits, then Cracker Barrel Old Country Store's (CBRL) restaurants might be the place for you. The company caters to motorists, with 85% of locations on the country’s interstate highways. A total of 594 restaurants are operating across 41 states with concentrations east of the Rocky Mountains in the Rust Belt and Southern states. The company estimates that it has the potential to nearly double its unit count in the future.

Cracker Barrel also sells retail products, which account for about 20% of total revenue. While Cracker Barrel has a large breakfast segment, it only accounts for about 23% of sales. The rest of sales are nearly evenly split between lunch and dinner. The company’s average check size has increased each year since 2007, from $8.31 to $9.02 in 2010. Average check size has outperformed traffic declines during that period of time.

For fiscal-year 2010 (the company has a July fiscal year), the company generated year-over-year earnings growth of 12%, to $3.62 a share. For fiscal-year 2011, Cracker Barrel has guided to EPS of $3.95 to $4.10, and the company reported stronger-than-expected fourth-quarter earnings of $1.14 a share.

During the conference call, management made clear some very important points that should continue to support future growth. First, the summer travel season was strong as pent-up demand began to put more people in cars, on the road and eating out. Cracker Barrel believes that it generated excellent goodwill from travelers this season, which will benefit the company in the future.

Second, in 2010, the company opened six stores and closed one. Cracker Barrel expects to open 11 new units in fiscal-year 2011.

Third, cash flow generation was strong, allowing Cracker Barrel to pay 80 cents per share in dividends, repurchase 1.35 million shares and still have approximately $48 million of cash on hand. The company also reduced its long term debt from $638 million a year ago to $574 million at the end of this most recent period.

Also: 9 Companies Sitting on Piles of Cash

Fourth, while commodity costs are expected to rise 1.5% to 2.5% for the year, nearly 61% of commodity needs were locked in for the upcoming year.

Lastly, egg prices have now settled down after rising during the year. I would have to say that the recent egg recall that hit parts of the country did not impact Cracker Barrel in a negative way.

Cracker Barrel is my favorite stock of the group. By my estimates, the company will grow earnings by 12% to 15% in fiscal-year 2011. Since April, Cracker Barrel has delivered two better-than-expected quarters. Based on my estimated earnings for 2011 of $4.05 to $4.10 a share, and applying a 15 times earnings multiple, I am fairly valuing Cracker Barrel at $61.50, which implies more than a 20% price return to my target. Furthermore, the stock pays an annual dividend equating to about 1.6% per year.

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