Activist Track: Put Land on Denny's Menu

I got excited about Denny's (DENN - commentary - Cramer's Take) last week when savvy investor Jason Ader from Hayground Cove filed his most recent 13D on the company. His last batch of 1 million shares (he now owns 6 million) cost him between $4.52 and $5.83, so at Denny's Tuesday closing price of $4.02, we could piggyback on his position at a substantial discount.

Ader was a successful gaming and lodging analyst for Bear Stearns for many years. Institutional Investor ranked him as the top analyst in the sector in 2000. Bear Stearns was his seed investor when he started Hayground Cove.

In his three 13D filings, he doesn't present any ideas for the company. I can guess what he might be thinking, though.

As with any fast-food company, you have to look at Denny's from two angles: as a cash-flow-generating business and as a resource allocator. In other words, is it better for Denny's to own its assets (real estate, restaurants, etc.) or to somehow convert those assets into cash for shareholders?

As a cash-flow-generating business, Denny's is good but not remarkable. It generated $54 million in cash from operations over the past 12 months, which is about the same amount it plans to spend on capital expenditures (fixing up restaurants, purchasing restaurants) over the next 12 months. It has flat revenue growth and $550 million in debt, secured by its real estate as collateral.

Right now it's paying off debt with cash flow. This is great when it works -- the company gets to build its business with debt and slowly increase shareholder equity in the business as it pays down debt. However, $54 million in cash flow a year to pay down $550 million in debt is not going to cut it.

---

At the time of publication, Altucher and/or his fund was long Denny's, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

Interested in more writings from James Altucher? Check out his newsletter, TheStreet.com Internet Review. For more information, click here.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.