By Sam Boughedda
A Wedbush analyst upgraded shares of Denny's Corp (NASDAQ:DENN) to Outperform from Neutral on Tuesday, raising the firm's price target on the stock to $12.50 from $10 per share.
The upgrade was made due to what the analyst described as "very positive management meetings." Wedbush increased its 2022 and 2023 estimates as a result.
"We believe upside to current 2H:22 and 2023 expectations exists and that DENN's LT 10%+ annual EPS and FCF/share growth algorithm is intact under new CEO Kelli Valade," wrote the analyst. "We came away from meetings with CFO Robert Verostek, VP of IR Curt Nichols, and Director of IR Kayla Money incrementally positive that 1) DENN is poised to successfully hurdle 2H:22 and 2023 expectations; 2) DENN's historical drivers of consistent 10%+ annual EPS and FCF/share growth are unlikely to change under new CEO Kelli Valade; and 3) the Keke's acquisition is on track for a successful integration. The meetings took place on August 17th."
The analyst added that there is a potential upside to near-term same-store sales growth expectations, with Q3 guidance for same-store sales flat to 2%, with the consensus estimate at 0.8%.
"The primary drivers of near-term SSS growth are management's incremental focus on value, the continued increase in 24/7 units (total system sales ~6% below pre-COVID w/47% of units still not back to 24/7 operations at the end of Q2), and the precipitous fall in gas prices (should help on the way down just as it hurt on the way up)," wrote the analyst.
The analyst concluded that the second half margin trajectory points to a potential upside as well: "Q2's UL margin of 8.8% is, in reality, 13.5% when adjusted for the one-time $2.3M legal reserve. The current Q3 and Q4 UL margin consensus estimates are 11.8% and 13.3%, respectively. Wage rate growth is expected to continue to decline from Q1's 10% and Q2's 8% through the second half. Food basket inflation has started to ease from highs (18% in Q2), with beef, pork and dairy moderating in Q3 and the benefit of moderating egg prices expected in Q4."
Denny's shares jumped 7.25% during Tuesday's session.