DineEquity (NYSE:DIN)

The stock is way ahead of itself. At the core of the turnaround plan is re-franchising corporately owned/operated Applebee’s. While the outlook for the credit markets is uncertain, the restaurant franchise finance market has shut down. GE Capital, the primary lender to restaurant franchisees, has all but stopped lending to the industry by increasing interest rates beyond acceptable levels. Other major players, Merrill and BofA, have discontinued lending money to the industry. Due to the loan size and franchisee net worth requirements, the SBA is not an option. There are no lenders with enough industry knowledge to finance the acquisition of stores.

Julia Stewart is the darling of the industry and is probably the reason why people by the stock. She was in charge of operations at Applebee's when the Applebee's brand was growing strong and worked her magic as CEO of IHOP when the IHOP system desperately needed to elevate the consistency of operations (quality service cleanliness).

Applebee's has hit a ceiling as far as the ability to open new units that will generate above average sales and the casual dining segment has way too much capacity. Applebee's franchisees are strong, professional restaurant management companies that will resist any initiatives that do not provide a good return on investment.

IHOP has driven out franchisees with poor operations, raised the bar for the overall system, and strengthened the brands awareness through advertising. The low hanging fruit has been picked and sales/profit growth will happen slowly over multiple years.

I believe management’s hands are tied for the next twelve months or so and won’t be able to engineer the earnings improvement.