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Why Franchises Are Good for Investors

DineEquity (DIN - Get Report)
Company Profile: DineEquity focuses on franchising IHOP restaurants as well as Applebee's, which the company acquired in November 2007.
Share price return: 10.2% this year
Franchise locations: As of March 31, DineEquity reported 1,738 franchised Applebees, compared with 271 company-owned restaurants. The company said there were also 1,329 franchise IHOP restaurants at the end of the first quarter, compared with only 10 company-owned locations.
Revenue from franchises: Franchise-related revenue accounted for 49% of DineEquity's $300.2 million in total revenue last quarter. The company had $104.5 million in franchise revenue, $32.2 million in rental revenue and $8.7 million in financing revenue. That compares with about $155 million in revenue from company-owned restaurants.
Franchise costs: According to Applebee's international franchising requirements, the company generally requires a minimum $1 million net worth for each restaurant. There is also a $40,000 franchise fee per restaurant, a royalty fee of 4% of gross sales, as well as an advertising fee that is not less than 3.5% of gross sales.

For IHOP franchises, the company has minimum financial requirements of a $1.5 million net worth and $500,000 in liquid assets. IHOP doesn't publish franchise fees on its website, but the company notes that the cost of construction for a standard prototype IHOP restaurant is approximately $960,000 to $1.2 million. Additional cost of equipment, seating and point of sale system are about $480,000, the company says.
Analyst view: Three research firms recommend buying shares of DineEquity. One of those first -- Raymond James -- has a "strong buy" rating on the stock. The other five analysts following DineEquity rate it a "hold."

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