ROPI & MM Valuation

Residual Operating Income (ROPI) Model

The first alternative valuation model used when analyzing Denny's Corporation is the ROPI, Residual Operating Income model. This method calculates the value of the company by considering current, revised NOA plus the present value of the ROPI from the past measured five years. To determine the revised Net Operating Assets, first the Operating Lease Adjustments (average of capital and operating lease obligations from 2017-2021) were added to Total Assets, the result of which equaled the revised total assets. Subtract excess cash assets and operating liabilities, both calculated under NOA in the FCF, and the final Revised NOA was determined for each year, the fiscal year 2021 ending value at $297.72. If compared to the NOA from the FCF, the difference can be noted in the revised NOA for FY2017 and FY2018, which included the adjustments for operating leases that were not included in the rest of the years analyzed.

To create Proforma statement of the Residual Operating Income for the next 10 years, a baseline ROPI was selected to base each fiscal year's growth off of. This baseline ROPI is the average of the ROPI from the last five years, $29.13. Growth rates for each year were the same rates taken from the Free Cash Flow valuation; these rates reach a peach in 2024, increasing because of Denny's opening of many new franchises and gaining more assets, but given that the company is still in the restaurant industry it cannot maintain extreme growth like that long term, so the rates began to decrease until hitting a long-term growth rate of 1% in 2032. ROPI grew as a result of each year's growth rate %, increasing to a final value of $94.00. The Terminal Value was calculated by dividing the ROPI of 2031 by the long term growth rate subtracted from the baseline ROPI. This Terminal Value represents the present value of all the future cash flows when there is a constant expected long-term growth rate. The final Terminal Value summarized both the ROPI and TV from 2031. This indicates the value of Denny's in the future; the final $1,245.94 (millions) is relatively low if compared to competitors (BLMN, for example, has a value of $3,370), but it indicates increasing value which is a positive benchmark.

To find the final Value per Share, PV of the estimated ROPI was calculated first. This was done with a Net Present Value calculator and using WACC so there was an equal weighted cost of capital, as well as the terminal values from 2022-2031. This PV, added to NOA as well as the Value of Excess Assets (see Revised Total Assets in Figure 1), equaled the Firm Value of $1,589 (millions). From this valuation, debt was subtracted to find the firm's Equity Value, and when divided by the number of shares outstanding (as reported by Valueline), a final Value per Share was determined to be $22.79. If considering Denny's via this ROPI model, the company would be undervalued, as it's share value exceeds the current reported market value of $11.90.

Market Multiples Model

The Market Multiples model is a method of valuation that instead of using forward looking rates, it compares multiple competitors within the industry and their financial metrics. Competitors analyzed included Bloomin, Dave and Busters, Cheesecake Factory, and Brinker International. The metrics compared were Sales per Share, "Cash Flow" per Share, Earnings per Share, and Book Value of Equity per Share; all were reported by Valueline. Denny's by far had the lowest metrics out of all competitors, and had the lowest stock price as well. Notice that the Book Value per Share is negative for Denny's; since this came straight from Valueline, and was not a calculation I made, it most likely indicates that the market believes that Denny's liabilities are exceeding their assets. The market multiples were calculated by dividing the stock price by whatever metric was being measured. Each competitor's multiple that was identified as an outlier is written in a text color of red.

Once the market multiples were determined for competitors, an average of the multiples was calculated, once as a result of all observations, then again excluding the outliers (red text in image above). After finding the averages for each metric, the values were used to calculate the implied price for Denny's as a result of multiplying the metric times Denny's original stock price of $11.60. Ultimately the values were used that excluded outliers, because they were too extreme and threw off the average calculations. NOTE that Price Book ratio was not included because Denny's Book Value of Equity per Share was negative, and would have been an outlier throwing off the calculations. So to find the Market Multiples Valuation, the average of Price to Sales, Market to Cash Flow, and Price Earnings (Trailing) values was calculated, with a final price of $4.15.