Archives February 2020

IHOP is thriving while Applebee’s struggles, driving mixed analyst reactions to Dine Brands stock

Dine Brands Inc.’s restaurant chains had divergent results for the fourth quarter, driving mixed reactions from analysts.

IHOP reported same-restaurant sales growth of 1.1%. But at Applebee’s, same-restaurant sales were down 2.5%.

Overall, Dine Brands

DIN, -6.37%

reported a profit beat, but revenue missed expectations. Dine Brands also raised its dividend 10% to 76 cents per share, payable on April 3, 2020 to shareholders of record at the close of business on March 20, 2020.

Raymond James downgraded Dine Brands to market perform from outperform, citing Applebee’s underperformance compared with the broader industry.

See: Domino’s Pizza is doing so well it’s making analysts nervous

MKM Partners also downgraded Dine Brands stock to neutral from buy, saying it has “had all we can eat (for now).” However, MKM raised its price target to $105 from $90.

“The Dine Brands story has not materially changed over the last six months, but we believe there is a potential degree of uncertainty, which moves us to the sidelines,” Brett Levy, MKM executive director wrote in a note to clients.

It’s unclear whether there will be more promotions to keep up with the competition, whether the company can make good on its goal of growing its catering business, and the outcome of additional tech rollouts, said MKM.

Wedbush analysts are optimistic, however.

“We continue to view the reward as outweighing the risk at current levels as management works towards improving and stabilizing Applebee’s same-store sales growth,” analysts led by Nick Setyan wrote.

For the first eight weeks of the first quarter, Applebee’s has returned to positive same-store sales, according to John Cywinski, president of the chain, who spoke on the earnings call.

Read: Molson Coors is jumping into the hard seltzer category with Vizzy launch in March

Analysts say their checks support a positive inflection in quarter-to-date same-store sales at Applebee’s, with value, menu items and marketing supporting a bump.

The company has also “pruned up the U.S. system of brand-damaging restaurants over the past three years,” according to Cywinski, closing about 200 Applebee’s locations, with a target of shuttering no more than 10 or 15 restaurants per year going forward.

“Also after three years of navigating royalty and advertisement bad debt, we begin 2020 with a healthy franchise system and no material delinquencies,” he said on the call, according to a FactSet transcript.

Wedbush rates Dine Brands stock as outperform and raised its price target to $110 from $100.

Don’t miss: Tyson says pork exports to China soared nearly 600% in first quarter after swine fever outbreak

“Despite Applebee’s missing fourth-quarter same-store sales, solid year-to-date sales trends, a return to a greater focus on value and the benefits of scale (technology and marketing reach) give us confidence in positive same-store sales at both brands in 2020,” wrote SunTrust Robinson Humphrey analysts.

SunTrust rates Dine Brands stock buy with a $117 price target, up $6.

Analysts note plans to open 40 to 50 new IHOP locations, with expectations that Applebee’s will start adding new locations in 2021, including international restaurants.

Dine Brands stock sank 5.3% in Tuesday trading and 7.8% over the past year. The S&P 500 index

SPX, -0.63%

 has gained 15.3% for the last 12 months.

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Pandemic 2020 And The Markets

A version of this piece first appeared on 2/23/2019

(image credit: BBC)

Just in the last 5 quarters, we’ve survived a trade war (that was not really a trade war), rate hikes that caused an unwarranted and unnecessary panic, and a barrage of unpredictable Twitter missives from the White House the likes of which the world had never before seen.

It remains to be seen, however, whether the record-setting bull market will outlive the novel coronavirus pandemic of 2020.

In January, details began to leak out of China regarding a large-scale outbreak of a novel form of coronavirus which ostensibly was transmitted from animals to humans. From purely a market perspective, this, in and of itself, is neither that uncommon nor troubling. Our models seek analogs, and quickly identified SARS (2002), Asian flu (2009), and MERS (2012) as potential reference points for comparison. In each case, initial outbreaks resulted in minimal lasting or substantial market impacts. Last month, as predicted, we saw an initial dip in the S&P 500 realized as portfolios were rebalanced to account for increased risk, followed by a rapid recovery of lost ground.

Over the course of the last week, facts on the ground have shifted our model analogs. While scientific factors such as the virus’ transmission methods, its incubation period, and fatality rates are all important, in respect to the market, the effect on production and consumption is key. Of equal importance is the perception of that potential threat in the minds of risk managers and institutional investors. Relative to the latter factors, better comps may today be influenza pandemics in 1918, 1957, and 1968.

The effects of the novel coronavirus outbreak are, in many ways, without precedent. While historical pandemics may very well prove to be far more widespread and fatal, modern corporate and public health standards, the nature of today’s intertwined global economy, and the use and availability of relevant data to risk managers together mean that the effect of an outbreak may look far different today than it would have decades ago. With major manufacturers from Volkswagen and Samsung to tech giants Apple, Facebook, and Google already significantly curtailing operations, economic impacts, relative to the size, lethality and infectiousness of the outbreak, are likely far greater than have ever been witnessed in such circumstances.

And, I predict, things are about to get much worse. With the emergence of hundreds of cases in each of Europe, South Korea, and Japan, and no sign of containment yet in sight, the effects on supply chains and ultimately consumption will grow worryingly. If you believe the markets have accurately priced in the effects of the outbreak on China, try a quick activity. Assuming that China’s first quarter GDP is likely to be cut in half is a good starting point. Now, let’s compare China’s GDP to the combined GDP of the 31 other countries, as of this writing, with documented coronavirus infections. If it seems too pessimistic to suggest that all will witness similar infection trends, then let us start only with Italy, Japan, and South Korea, where the outbreak is spreading quickly and ostensibly not under control. Keep in mind that we don’t actually need to see the same gross number of infections or deaths witnessed in China; rather, simply the presence or threat of the infection is sufficient to significantly impinge manufacturing and business at all levels. Suddenly, our immediate impacts have increased by 60%. Say what you will about the Chinese response, but if a totalitarian regime with the power to shut down entire cities and provinces at the snap of its fingers can’t stem the spread of the outbreak, are we quite certain that the circumstances won’t get worse before they get better? In places with weaker health care systems and infrastructure, such as Iran, for example, it seems extremely likely that the mortality rate isn’t actually ten times greater than has been observed in China to this point, but rather that the outbreak is already far more widespread, and far less controlled, than known or acknowledged.

Independent of this newest challenge, this business cycle is long in the tooth, with a raft of negative economic data poised to land in the coming weeks. The coronavirus outbreak itself will not independently cause a recession, but may still usher one in. Whereas Trump and the faux trade war would have shouldered the blame 12 months ago, right or wrong, I expect the outbreak to dominate market headlines the first half of this year. Only time will tell whether this is the straw that breaks the camel’s back, but, for the first time in a long time, we are content to sit out this particular dance.

This piece is purely editorial, reflecting only the opinions of the author. It is not representative of Deep Data Financial LLC or Meadowlark Financial Technologies LP. It is not, and should not be taken or interpreted as, financial advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Mastercard CEO Ajay Banga to step down, insider Miebach tapped By Reuters

© Reuters. Mastercard President and CEO Banga speaks to attendees during the Department of Homeland Security’s Cybersecurity Summit in Manhattan, New York

(Reuters) – Mastercard’s chief executive officer of 10 years, Ajay Banga, will step down at the start of the next year, the company said on Tuesday, and be replaced by Chief Product Officer Michael Miebach.

Banga, who took charge of the company just after the 2008-09 financial crisis, has seen the payment processor’s revenue triple during his tenure as online shopping gained prominence around the world.

India-born Banga will take on the role of executive chairman, while Miebach will become the company’s president on March 1.

Chairman Richard Haythornthwaite will retire after more than a decade when Banga assumes his new role, the company said in a statement.

Before joining Mastercard (NYSE:) as president of Middle East and Africa in 2010, Miebach served as managing director at Barclays (LON:) Bank and general manager at Citibank.

In connection with Miebach’s appointment as president, Mastercard has entered into a new compensation agreement that adds $750,000 to his annual base salary, the payment processor said in a filing.

Miebach will also receive an equity grant with a target value of $6.25 million.

His compensation as chief executive officer will be determined later, the company added.

Mastercard on Monday warned its first-quarter net revenue would take a hit if coronavirus outbreak persists through the quarter.

Shares of the company were down nearly 2% at $319 in the premarket trade.

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Prepare now for the post-coronavirus bond market, this investor says

Kevin Flanagan, WisdomTreet head of fixed income strategy, speaks on a recent podcast

Kevin Flanagan, head of fixed-income strategy at ETF powerhouse WisdomTree, has watched fluctuations in bond markets his entire career. Now he’s taking a somewhat contrarian view of how investors should be positioning. Look past the current coronavirus concerns, he counsels, and “swim against the tide” to where bond markets will likely settle after the news cycle moves on.

MarketWatch spoke to Flanagan on Friday, February 21, a day when news related to the coronavirus was walloping the markets. Business activity in the U.S. contracted for the first time in four years in February, according to a survey from IHS Markit, the 30-year U.S. Treasury bond

TMUBMUSD30Y, +0.22%

  hit its lowest point ever as investors flocked to safety, and stocks took a bruising. The sell-off continued on Monday.

The interview that follows is lightly edited for clarity.

MarketWatch: Explain your premise about how fixed-income investors should think about the coronavirus.

Kevin Flanagan: I’m using the SARS episode as a framework to try to position where rates and the economy could be when the news cycle for the coronavirus has peaked. We picked a great day to have this discussion. Today without a doubt you began to see the first signs in the US of the economy being impacted. The question is, what happens when we do have a peak in the number of cases? How quickly does that snap back? Will it be a V shaped recovery or U-shaped?

A V-shaped recovery would be what we got from SARS. GDP went from a low of 0.6% in the fourth quarter of 2002 and then snapped back to 7% the next year. The 10-year Treasury fell 105 bps during SARS. When all was said and done, we ended 25 basis points higher than the level when SARS news first hit.

MarketWatch: We’ve discussed China’s very different place in the world now than when SARS hit. The World Bank estimates it accounts for 19.7% of the world’s economy now versus 8.7% in 2003, for example. What does that mean for using SARS as a model?

Flanagan: Some of the reading I have done suggests economists are expecting production in China to get back to 100% by late March. If that’s the case you shift into the V-shaped camp. If it extends into the second quarter it could be more prolonged.

But I think this is more of a first-quarter phenomenon. Say we get (U.S. GDP growth) close to zero. I don’t think it’s out of the realm of possibility that once the second half comes and we have seen the news peak, back of the envelope, I think 4% growth is fair. And for Treasurys, the 10-year

TMUBMUSD10Y, +0.06%

  before the coronavirus was 1.80%-1.85%. If we were to recoup all that and add 25 basis points, that puts the 10 year at 2% or over.

You have begun to hear more about US-based companies seeing if there are American or other global alternatives where they could get their supplies from rather than China. If we do get a situation where supplier deliveries are disrupted, we could get some transitory inflationary pressures as well. If you need to get your supplies from US firms, they might be not as cost-effective as China.

Related: Investors are ‘too complacent’ about the possibility of a pandemic, these analysts say

MarketWatch: If there are stirrings of inflation and a stronger economy in the U.S. than elsewhere in the world, won’t we see capital flowing in, and simply depressing rates again?

Flanagan: We’ve seen that throughout this cycle. When US rates have a more visible spread versus other sovereigns, you do see money flowing in. I would look at it as a cap on rates, not as something that would push rates lower.

MarketWatch: What should investors do to prepare?

Flanagan: If we do head back toward 2% there is principal risk for moving too far out in duration. I think investors need to be thinking about that now. Often what you find is once the trend begins it can happen quickly.

We are suggesting a barbell strategy. (A “barbell” approach to bond investing involves short- and long-duration securities, avoiding medium-term bonds. That minimizes volatility as the yield curve shifts when rates are on the rise, and allows investors to capture the upside in short-maturity bonds as yields move higher.)

We think that’s a sound solution in this kind of environment, dealing with not just uncertainty, but timing uncertainties, and what it could mean for rates…. you’re not making an aggressive move. Skate to where the puck is going.

Read: Here’s the segment of the economy that may benefit from fears of coronavirus

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SFL Corp.: Excellent Performance From This High-Yielding Ship Company – SFL Corporation Ltd. (NYSE:SFL)

On Tuesday, February 18, 2020, ship leasing firm SFL Corporation (SFL) announced its fourth quarter 2019 earnings results. At first glance, these results appeared to be very disappointing as the company failed to meet the expectations of its analysts on either top-line revenues or bottom-line earnings. A closer look at the actual earnings report, though, does tell something of a different story as there were certainly a few things that investors should appreciate here such as the company adding to its backlog in spite of some of the fears that have been plaguing the industry. Admittedly, though, SFL Corporation has always been somewhat insulated from near-term industry problems. This should also help the company weather the problems that the coronavirus has caused for the industry so far this year. Overall then, investors should be reasonably satisfied with these results and have a lot of reasons to continue to be optimistic in the company.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from SFL Corporation’s fourth quarter 2019 earnings results:

  • SFL Corporation brought in total operating revenues of $119.877 million in the fourth quarter. This represents a 7.49% increase over the $111.527 million that the company brought in during the third quarter.
  • The company reported an operating income of $20.216 million in the most recent quarter. This compares favorably to the $20.181 million that the company reported in the previous quarter.
  • SFL Corporation added $224 million to its charter backlog due to receiving new vessels during the quarter.
  • The company sold $100 million worth of stock that it owned of oil tanker operator Frontline Ltd. (FRO).
  • SFL Corporation reported a net income of $23.642 million in the fourth quarter of 2019. This represents a substantial 518.58% increase over the $3.822 million that the company reported in the third quarter of 2019.

It seems essentially certain that the first thing anyone reviewing these highlights is likely to notice is that every measure of financial performance showed an improvement over the third quarter. With that said, though, at least in terms of revenues, the improvement was relatively small. This was not really unexpected, though, as the primary reason for this is that the company took delivery of two ships that were immediately chartered out to Hunter Group ASA under a five-year contract. I stated that this would be happening in my last report on the company. This does show that at least thus far, shipping companies continue to take delivery of vessels and honor their contracts in spite of the trade tensions between the United States and China. The coronavirus, however, was a non-factor during the fourth quarter, but it might have an impact later this year.

Unfortunately, though, some of the continued difficulties in the offshore drilling industry that we have been discussing in past articles had a negative impact on the company during the quarter. We see this in the fact that the company took a non-cash impairment charge related to five offshore support vessels. This is something that is required by accounting rules whenever a company determines that an asset is actually worth less than what it says on the balance sheet. As the value of a vessel is largely determined by its future earning potential, deterioration of economic fundamentals or dayrates in a sector can cause the value of a ship to decline. In this case, the value of the five offshore support ships went down by $34.1 million compared to the prior-year quarter so the company took a writedown of this size. It is important to note, though, that this was a non-cash charge and the company did not actually see $34.1 million leave its bank account so we can safely ignore the charge. If we do this, then the company’s increase in net income would have been even larger than what we saw.

One thing that is characteristic of SFL and some other companies that either are or once were associated with shipping tycoon John Fredrikssen is that they own stock in other companies. This benefited the company during the quarter as the strength in the market pushed up the value of these securities by $27.9 million. As was the case with the writedown on its ships, accounting rules require that the company record a mark-to-market gain on its income statement. While this does not necessarily represent new cash coming into the firm, it still has the effect of offsetting some of the impairment charge, which is one of the reasons why the company’s net income was not as low as it could have been considering the size of the writedown. With that said though, the company did sell some of these shares during the quarter and realized $13.7 million from this sale. This $13.7 million does represent money coming into the company’s accounts, unlike what the impairment charge represented.

One of the most important things for a company is to be able to maintain its income. This is of course also true for SFL Corporation. The company is fortunately decently well-positioned to accomplish exactly this. We can see this in the company’s charter backlog:

Source: SFL Corporation

The company’s contracted backlog is the total amount of revenue that it will bring in from its fleet going forward based on the contracts that it already has in place with its customers. As this revenue is backed by contracts, it is as close as we can get to guaranteed money in this industry. As we can see above, SFL currently has approximately $3.6 billion in revenue backlog, which represents thirty quarters at the fourth-quarter rate. Thus, the company can operate for roughly this long even if it fails to secure any more business for a while. This is the kind of thing that we like to see from a company that we are invested in.

Naturally though, this backlog will still run out eventually. That is why it was nice to see that SFL added to it during the quarter. I noted this in the highlights. As I stated there, SFL took delivery of two ships during the period and added $224 million to this figure. That is because these ships were already chartered to Hunter Group before it took delivery of the vessels. This is the core of the company’s business model. Basically, it purchases ships and then leases them to shipping companies under long-term contracts. As such, it operates almost like a bank to the shipping industry as opposed to an actual operator like Frontline or Golden Ocean Group (GOGL). This model gives the company an ability to weather problems in the industry that is far superior to other shipping firms. When we consider the problems that the Chinese coronavirus breakout has been causing for other companies, this will likely be appealing.

The company has certainly enjoyed success at executing this business model. As we can see here, the average remaining charter length on the company’s 88-ship fleet well surpasses five years:

Source: SFL Corporation

This positions it well to continue to deliver steady results for a while, despite the struggles in the industry. Thus, it can continue to be a source of income for us.

As is always the case though, we want to ensure that the company can actually afford the dividend that it pays out. This is because we do not want to suffer a dividend cut and the stock price decline that typically accompanies it. The best way to do this is by looking at a company’s free cash flow, which is the money left over from a company’s basic operations after it pays all of its bills and makes any necessary capital expenditures. It is usually calculated by subtracting capital expenditures from operating cash flow. In the fourth quarter, SFL Corporation had an operating cash flow of $58.396 million and had total capital expenditures of $10.287 million, which gives the company a free cash flow of $48.109 million. The company’s dividend only costs the firm $37.669 million based on the current rate and share count though. Thus, SFL Corporation appears to be generating more than enough cash to afford its dividend at present, although it is paying out a sizable portion of its money, which is frequently the case with this company.

In conclusion, this was a reasonably solid quarter for SFL Corporation and shows us the ability of the company to weather any problems in the shipping industry. These problems have unfortunately manifested themselves in a major way with the outbreak of the coronavirus in China that has caused the country to close off its ports and many of its businesses. This will only be a short-term thing, but it is still uncertain when it will end. In the meantime, SFL appears to be a way for investors in the sector to ride out these problems.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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