Reducing more than 310,000 of his shares at an average price of $62, this is Hawkins’ fourth stake reduction of DineEquity since acquiring the stock in the third quarter of 2008. Starting off with about 3.2 million shares in the beginning of his holding history, Hawkins now has a shareholding of 2,798,762.
DineEquity’s stock price is close to its 10-year high, trading at $63.06 this morning.
With a market cap of $1.14 billion, DineEquity is the parent company of restaurant chains, IHOP and Applebee’s Neighborhood Grill and Bar. Based in California, DineEquity operates more than 3,500 restaurants in 18 countries, making it one of the largest full-service restaurant companies in the world.
DineEquity has had consistent growth over the years, its value shooting in a positive direction especially over the last five years, with a revenue growth rate of 26.7 percent.
Hawkins, along with Southeastern Asset Management chief investment officer, G. Staley Cates, recognized this value growth in its third quarter shareholder letter released in October, stating:
“Many management teams have taken steps to remove their stocks’ discounts through spinning out divisions, selling all or portions of their companies, and initiating, reinstating, or meaningfully increasing dividends… In Small-Cap, DineEquity has sold the last of its owned Applebees restaurants to become 99% franchised.”
In its third quarter fiscal results, DineEquity reported to decreasing its debt by $167.2 million, due to generating strong free cash flow in the three months ending Sept. 30. Combining the company’s booming free cash flow with its reduction in expenses and net proceeds, DineEquity was able to reduce its total debt by $255.5 million in the first nine months of 2012.
Out of the 41 stocks in Hawkins’ portfolio, the consumer services sector is the second largest sector represented, right after the financials sector. As of the end of the third quarter, the portfolio is valued at $22.4 billion, with a quarter-over-quarter turnover rate of 2 percent.
Before choosing investments, Hawkins places heavy emphasis on a company’s management and its ability to operate the business. His firm's research especially focuses on four key areas:
- If the CEO’s interests are aligned with shareholders.
- The CEO’s operating and capital allocation record, at the current company and in previous roles.
- Using the firms’ vast network of clients, corporate managers, industry experts, and friends to find out everything we can about the CEO, including personal as well as professional insights.
- Hearing about the CEO and CFO’s management approaches, especially focused on building value per share, during an actual meeting with Insiders.
Pertaining to Southern’s investments, Hawkins and Cates said they predict their stocks will do well over the next five years, stating:
“Most of our companies are market leaders with competitive advantages that should enable some degree of pricing power as well as unit growth…Many have increased their shareholder alignment by buying shares personally over the last year. To the extent needed, we will push as hard as is feasible to insure that managements and boards remain focused on their obligation to act in the best interest of owners. We will move on to better opportunities if we believe our engagement will not produce positive change.”
With its P/E ratio close to its three-year low, DineEquity is ranked 6 out of 10 in Profitability and Growth on GuruFocus, despite a Financial Strength of 4 out of 10 and a 1-star rank in Business Predictability.
To read more about Mason Hawkins and Longleaf Funds, visit our GuruFocus article archives. Also see his top holdings, his undervalued stocks and his high yield stocks.
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