Wall Street Not Hungry for IHOP, Stock Underperforms.

THROUGH its International House of Pancakes chain, IHOP Corp. has been dishing out steadily increasing earnings to investors.

But despite double-digit earnings growth, the Glendale-based company's stock has tumbled from a 52-week high of $26 a share last June to a 52-week low of $14.94 in December. Last week, it was trading slightly below $17 per share on the New York Stock Exchange.

With a meager price-to-earnings ratio of 11.6, company officials recently announced a buyback plan for up to 1 million shares.

IHOP had not yet released its fourth-quarter earnings as of last week, but its most recent quarterly performance is a stark contrast to its lagging stock. For the third quarter ended Sept. 30, net income was $8.6 million (42 cents per diluted share), compared with $7.3 million (36 cents) for the like period a year earlier. Revenue was $72 million vs. $66.3 million.

Analysts attributed IHOP's lackluster stock to a general lack of appetite for the restaurant sector on Wall Street. "All restaurant stocks are suffering, and there's no good reason," said Michael D. Smith, an analyst with Fahnestock & Co. "IHOP plods along and does a pretty good job. There's nothing fancy about it. They've been around for 40 years and do a pretty good job of protecting their brand."

But while IHOP's overall revenues and earnings have continued to grow, its monthly same-store sales are sporadic -- and that is worrisome, according to Brandy Shin, an analyst with Goldman, Sachs & Co. "This is the first year where you have seen several months of negative same-store sales trends for IHOP," Shin said. "Before, they had a history of positive sales gains."

In December 1999, IHOP's same-store sales declined 1 percent, compared with December 1998. They had increased 1.1 percent in November, after declining 1.3 percent in October.

"There could be a shift in consumer spending patterns," Shin said, noting that customers seem to be moving away from the mid-scale family dining experience of an IHOP to the full-service casual dining experience of an Olive Garden, where the price points are $1 or $2 more per entree and alcohol is served.

To attract more customers to its 903 restaurants in 37 states, IHOP last year rolled out a new "after-breakfast" menu -- introducing the likes of chicken penne pasta, chicken fajita salad, and a sourdough bacon burger melt.

"We are still perceived by most customers as a breakfast destination," acknowledged Gene A. Scott, IHOP's controller and acting chief financial officer. "We are going to be supporting our new line of after-breakfast items with some advertising. We feel good that over time, traffic in those areas will increase."

IHOP is also expanding into new territories. Last year it concentrated on opening 76 new restaurants, most of which are franchise operations. About a dozen of those were in Oklahoma and Kansas, where IHOP previously had only one or two eateries, Scott said.

This year the company plans to open another 70 to 80 new restaurants. Some of them will be in Utah, Nebraska and Iowa -- where there has not been a major IHOP concentration, Scott said. Currently, its three largest markets are California, Texas, and Florida.

Overall, IHOP officials feel positive about the future of their family-style restaurants. Richard K. Herzer, the company's longtime president and chief executive, has been back on the job since October, after having had bypass surgery in September. And national trends seem favorable.

"We see data that show people are just continuing to get more meals away from home," Scott said. "That is basically good for all of us in the restaurant business."

                                IHOP Corp.
                               Stock Prices
YEAR (Dec.31)                   1998   1997
Revenue (millions)            $256.2 $215.5
Operating Expenses (millions)  194.5  148.0
Operating Income (millions)     61.7   67.5
Net Income (millions)           26.1   20.9
Earnings Per Share (diluted)   $1.31  $1.08

Quarterly Net Income (millions)

SUMMARY

Business: Restaurant franchiser and operator

Headquarters: Glendale

CEO: Richard K. Herzer

Market Cap: $336.9 million

Dividend Yield: N/A [*]

Total Liabilities: $281.4 million

P/E Ratio: 11.6

Long-Term Debt: $49.7 million

(*.)IHOP does not pay dividends.