Final Recommendation

Reflection

An entire semester has been spent analyzing Denny's Corporation and their various financial statements and metric, calculating ratios and making predictions from past data, and comparing the company to other competitors within the Consumer Discretionary (Restaurants and Bars) sector of the market. Throughout these studies of DENN, I have learned about the sector as a whole, how to recognize revenues and assets, calculate debt ratios to find the use of liabilities as leverage, calculate expenses (costs of capital), and use diverse methods to find the true valuation of the company, including free cash flow, residual operating income, and market multiples methods.

Final Valuation

After all the analyses and valuation models were calculated, the final Overall Value Estimate of Denny's is $19.22. While Free Cash Flow, ROPI, and the Market Multiples methods were all calculated, only Free Cash Flow and ROPI were used in the final calculation, which averaged those values of $15.65 and $22.79, respectively. Market Multiples was not included because it was a drastic outlier compared to the other two, with a valuation of about $15 less than the overall value estimate. This was due to Denny's extremely low metrics reported by Valueline for Cash Flow per Share, Earnings per Share, and Book Value of Equity per Share in fiscal year ending in 2022.

Considering which models were used for the final valuation, $19.22 is the value of Denny's after considering the many factors in this project. When compared to the price of $11.90 reported by Valueline and Factset in early November, I believe that Denny's is undervalued from the market.

Recommendation

After a very detailed analysis of Denny's Corporation, my recommendation is for investors to purchase DENN, but only to keep it short term. Right now growth rates are very high, and Denny's isn't financing too much of their activity with debt; after opening so many franchises over the past few years, the company is bringing in a lot of revenue and has recovered very well post-COVID. However, due to recent loans taken on, the fact that Denny's hasn't historically had very high growth rates, and seeing as the company is in the Restaurant and Bars sector which is very volatile and can turn quickly, I believe that recent debt could catch up to the company in the long term and value would not be as high. For now, though, they are outperforming the market valuation, so they are selling at a discount. Compared to competitors, Denny's has a healthy Z-score of 2.19; while considered the "grey zone", this is altered for companies operating under Restaurants, as the industry is more volatile. Furthermore, until 2020/2021 Denny's was barely utilizing any debt; it was only in that fiscal year the company took out some loans, which for the short term will not have a negative effect at all on the value. By opening a large amount of new franchises, the company has indicated a desire for innovation and expansion, which if kept in check can help Denny's grow tremendously.