Solid Franchise Models Offer Superior Margins and Better Return on Capital: An Experienced Portfolio Manager Discusses His Favorite Picks in the Restaurant Industry

Wall Street Transcript

67 WALL STREET, New York - March 1, 2013 - The Wall Street Transcript has just published its Large Cap Value Report . The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Value Investing - Long-Term Investing - Bottom-up Investing - Global Investing - High Quality Companies - Investment Strategies - Large Cap Investing

Companies include: Denny's Corp. (DENN), eBay Inc. (EBAY), Amazon.com Inc. (AMZN), Google Inc. (GOOG), The Home Depot, Inc. (HD) and many more.

In the following excerpt from the Large Cap Value Report, an experienced portfolio manager discusses his investing methodology and top stock picks:

TWST: What are some of the specific companies you like right now and why?

Mr. England: One company that we like is Denny's (DENN). We invested in mid-2011. Most people are familiar with Denny's; it is the number one family dining chain in units and number two in revenues in the country. There are roughly 1,700 units and of those almost 90% are franchised. The brand is positioned as a 24-hour diner and is best known for breakfast and late-night dining, with the average check less than $10.

Before we invested, the company had experienced several quarters of declining earnings per share due to rising food costs and lower sales. Sales were hurt by declining traffic. This stemmed from prices that had been ranged too aggressively over the previous few years, inefficient marketing and a lack of investment in their locations. Despite these problems, the company did have some things going for it, such as scale advantages and high brand awareness.

In addition, we saw several potential sources of positive changes happening at the company. There had been several management changes in 2010 and 2011, including a new CEO, new COO and a new Chief Marketing Officer, all with significant experience in the restaurant industry. The CFO had come in a couple years before and led the effort to refranchise company stores and to reduce debt levels. We liked this because the franchise model offers superior margins and better return on capital, and also because we have a preference for a conservative balance sheet.

New management implemented a turnaround strategy focused on rebuilding the brand image that had been somewhat neglected for several years under previous managements. This effort includes better marketing, a revamped menu and a remodeling program for the restaurants to get them more up to date. Further opportunities could come from building up...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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