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Barrick Gold's Beating -- Barrons.com

18 Feb 2017 6:01 am
By Ben Levisohn 

As Kenny Rogers sang, "You got to know when to hold 'em, know when to fold 'em." I know it's not only time to retract my cautious take on Barrick Gold (ABX), delivered in this space, but to eat some crow.

In last week's Trader, I argued that Barrick's earnings, reported Wednesday, would be less relevant to the stock than the price of gold. And I worried that the precious metal, which had gained 9.5% since Dec. 15, was headed for a fall. So I recommended that investors wait for the plunge in the stock price before buying shares. Simple, right?

Turns out earnings really do matter for gold miners. Quite a bit. Barrick reported a quarterly profit of 22 cents a share, beating forecasts of 20 cents, and boosted its production guidance. The gold miner even raised its dividend from two cents to three cents a share. It was a "strong quarter," BMO Capital Markets analyst Andrew Kaip wrote in a note to clients. The quarter was so good -- and the outlook so strong -- that Barrick shares jumped 6.1% Thursday, to $20.50.

In hindsight, either I should have extolled the merits of the fundamentals -- GoodHaven's Larry Pitkowsky points to Barrick's continued cost-cutting, deleveraging, and focus on asset allocation as reasons for optimism -- and simply noted the risk posed by a possible plunge in gold prices, or told readers to avoid the stock completely. I'm glad, at least, that I didn't do the latter.

DineEquity Boss to Depart, But Problems Remain

DineEquity's stock fell 10% Friday, to $60.14, after the company said its long-time chairman and CEO, Julia Stewart, will resign March 1. The shares have fallen $23 since mid-December, when Barron's published a skeptical view of the company, highlighting its likely difficulty in meeting Wall Street's profit expectations (" DineEquity Shares Could Fall 30%," Dec. 17, 2016.)

Stewart's abrupt departure supports our contention that DineEquity's (DIN) "asset light" policy reduced its capacity to improve weak franchisee operations. Additionally, we argued that the company was spending too much on share buybacks and dividend increases, and too little on investments, particularly at its 2,000 Applebee's outlets.

Franchisees, who own 99% of DineEquity's units, haven't fared well recently. Applebee's has been losing market share for years, and fourth-quarter same-store sales fell 7.2%, the sixth straight quarter of negative comps. The company also reported 2016 earnings per share of $5.33 a share, much lower than Wall Street expectations of $6.04 just a few months ago. It will report full-year results on March 1.

Even DineEquity's 1,700 IHOP restaurants, once an island of stability, are slipping. In the fourth quarter, same-store sales declined 2.1%.

Stewart pushed the "asset light" model, so her departure is a positive first step toward change. Given the dividend payout exceeds 70% of earnings, it might make sense to cut it and use the cash to fix the brands, says Michael Gallo, director of research at C.L. King. The 6.4% dividend yield seems unsustainable.

Much still needs to be done operationally, as well. There are too many Applebee's units in the U.S. In the short term, things are likely to get worse before they get better. The company needs to hire a good CEO and a president just for the Applebee's brand, says Howard Penney, an analyst at Hedgeye Risk Management who has been critical of the company. "After that, the company still has to turn it around."

Shares of DineEquity, which declined to comment beyond Friday's press release, have nearly met our downside expectation, but Stewart's exit isn't enough to merit buying the stock. We'll declare victory and move on from DineEquity.

-- Vito J. Racanelli

See Trader: Washington Turmoil Can't Deter Market Highs

Email: editors@barrons.com

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(END) Dow Jones Newswires

February 18, 2017 01:01 ET (06:01 GMT)

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