DineEquity Dropped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: IHOP operator DineEquity (NYS: DIN) got scraped into the refuse bin this morning, dropping 16% as trading winds down for the day.

So what: IHOP sales are looking to come in at the low end of forecast numbers -- suggesting a 2% decline in same-store sales this year (versus Applebee's results that are trending toward 4% growth.) Weak results at IHOP contributed to DineEquity as a whole as revenues slipped in Q2 and profits fell $0.02 short of Wall Street estimates.

Now what: Unprofitable, debt-laden, and now the recipient of an earnings miss, DineEquity shares aren't likely to appeal to stock shoppers any time soon -- but maybe they should. Look behind the kitchen doors, and you may be surprised to see how much cash this business is cooking up.

Free cash flow for the past 12 months approached $175 million, much better than the net loss shown on DineEquity's income statement. At its current $825 million market cap, these shares are priced at less than 5 times annual free cash flow -- not bad for a company that most analysts still expect to grow at 11% per year going forward. If management continues to make progress paying down its debt, DineEquity shares could turn out to be quite tasty.

Want more info on DineEquity?Add the stock to your Fool Watchlist.

At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of DineEquity. The Motley Fool has adisclosure policy.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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