Denny's Stock Gets Upgrade As More Restaurants Reopen

The case against owning Denny's Corp (NASDAQ: DENN) was based on the restaurant chain's heavy exposure in California, but now is the right "time to get off the sidelines," according to Stephens.

The Denny's Analyst: James Rutherford upgraded Denny's stock rating from Equal-Weight to Overweight with a price target lifted from $19 to $24.

The Denny's Thesis: Denny's presence in California accounts for one-quarter of all stores closed for indoor dining until recently, Rutherford wrote in the upgrade note. But in the past few weeks, 24 out of 58 counties now offer indoor dining at 25% capacity.

Encouragingly, locations that reopened in California in recent weeks were reporting comps of negative 15% versus those that remain closed showing negative 42% comps.

Outside of California, the restaurant reopening play continues to unfold as 10 states now permit 100% capacity with no physical distance requirements. This should be a continued trend.

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Meanwhile, Denny's continues to build out its two virtual brands, The Burger Den and The Meltdown. While the long-term growth prospects of its virtual brands are difficult to model, the two have the potential to evolve into "sustainable brands."

Some of the other catalysts that support the case for buying Denny's stock include:

1) A less competitive restaurant environment after one out of six of all U.S. restaurants are temporarily or permanently closed. 

2) Strong pent-up demand for a return to restaurants

3) Management's outlook of increasing its store count from 1,500 to 2,000.

DEN Price Action: Shares of Denny's were trading higher by 2.2% early Friday morning at $18.91.

(Photo: Mr. Blu Mau, Flickr)