Two Stocks: One Turnaround Restaurant and a Patent Troll Killer

August 5, 2013 | Comments (0)

A look at two potential ideas. One is a restaurant business that has been turning around and heading in the right direction since 2009 and the other is a new company with a unique business model of defending against patent trolls.


Turnaround Story of Denny’s (DENN)

Good ol' Denny's

Good ol’ Denny’s

Denny’s owns and is a franchiser of family diners. The company controls about 9% of the family dining market and competes directly with IHOP which controls 11%.

When you look at the fundamental numbers, it doesn’t look like a value play. However, over the past few years, Denny’s is focusing on paying back debt and buying back shares.

Revenues have declined every year since 2006, but interestingly, gross margins have gone up from 18.5% from 2006 to 29% TTM. This margin expansion has traveled all the way down to the bottom line because Denny’s is FCF positive and 2011 and 2012 were stellar years in terms of FCF.

The TTM figures looks to be slightly less than 2012 FCF of $45m, but in their situation, this year will be another successful and FCF positive year.

Looks like Denny’s has been putting all that free cash flow to good use as well.

  • Since 2008, long-term debt has been reduced by almost 50% TTM
  • Shares outstanding has decreased 7% from 2010

Another interesting piece is that 2013 may be the year where shareholder equity reaches positive territory for the first time in more than 10 years.

This small cap also has some guru activity.

Jim Simons has been going in and out of Denny’s since 2009 while Joel Greenblatt has a 50% profit off Denny’s.

If further cost cutting, debt repayments and its international expansion plans go well, Denny’s could be a nice turnaround story. At this point however, using a 8% growth rate with 10% discount rate, Denny’s looks to be fairly priced.

Denny’s also has brand recognition which works in its favor. As an example of loyalty, in Seattle where I live, hundreds of residents protested against the demolition of a landmark Denny’s. Sadly, it was demolished.

 Additional reading

Download the DENN PDF Tearsheet

First to Market with a New Business Model: RPX Corporation (RPXC)

Patent Trolls

Patent Trolls | Click to Enlarge

Non-performing entities (NPE) is a nice way of saying patent troll. The current “get rich scheme” of the corporate world.

So how do NPE’s operate?

  1. Buy a few hundred patents on the market
  2. Start looking for any company or any one using something similar
  3. Sue the pants off everyone within a 100 mile radius for infringement

It’s a lot like internet domain squatting.

Companies buy up a ton of url’s and then they sell it to companies for thousands or millions depending on the attractiveness of the URL. I know because some guy from South Africa was squatting on oldschoolvalues.com and asking thousands for it.

NPE patent enforcement used to be an issue that affected high technology sectors like hardware, software, semiconductors, communications, and consumer electronics. This is no longer the case because it is has now spread to all industries, including users and sellers of products.

I blame Apple for starting this by the way :)

This is where RPX comes in. RPX buys a bunch of patents in the open market and then makes it available for their “members” to use in their products. This ensures that the members are not subject to patent litigation. If they are, RPX takes care of it.

Some numbers to help you visualize the company. Interesting business to learn none the less as you are going to see similar companies start to pop up if RPX takes off.

RPXC valuation ratios

RPXC Valuation Ratios

Additional Reading

Download the RPXC PDF Tearsheet

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Disclosure

No positions

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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