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TWST: Tell us how you view the health of the restaurant industry today and the outlook for the fundamentals over the next six months.

Mr. Hickok: Industry fundamentals have not been this positive in about 10 years, to the best of my recollection. We are particularly confident about the earnings prospects and stability of the group, and we have been very bullish about the price appreciation potential for these stocks for a while. We made comments at the very end of February, which we wanted to project to the Street about this point. Our caveat was that we might be early and that we needed the technology sector to soften, but our message was very simple.
The irony was that in spite of very strong fundamentals, the valuations had never been lower. Our conclusion was that if there was any softening in the technology sector, the restaurant sector was going to be a solid place to put money, and at minimum, a defensive place to invest. We are not prescient, but as it turns out, just about two or three weeks later we had the softening of tech that we needed. And since mid-March, the restaurant sector has significantly outperformed the market. The macro environment has never been as favorable as it is right now. We expect to have very solid, if not spectacular earnings coming out of the segment defining restaurant companies in the fourth quarter and in the first quarter.

TWST: Let’s start with Applebee’s (Nasdaq:APPB). What’s the rationale for investing in Applebee’s today?

Mr. Hickok: Applebee’s fundamentals are very strong and earnings growth appears to be stronger than they get credit for. It’s a franchise company where the franchise royalty stream has assumed a bond-like character in terms of predictability. This insulates the company from a lot of the vagaries of operations. I would pay a lot more for that franchise’s income stream than you might pay for the income stream of a pure operating company. But they also have their own company operated earnings portion, which is very strong. Applebee’s remains one of the true success stories in the restaurant industry. It is the largest casual dining company with a pure concept. It has had extraordinary success nationwide. Its financial performance is among the best of any restaurant chain’s in terms of same-store sales, margins and predictability of earnings. It has a great balance sheet, is generating free cash flow, and is repurchasing its stock with that free cash flow. It’s growing earnings sustainably somewhere between 18% and 20%, even more rapidly recently, and as of yesterday, was still trading for just 13 times forward consensus earnings.

TWST: What kind of time frame should an investor have if he or she were to buy Applebee’s today? Would you buy it looking out six months, or 12 months?

Mr. Hickok: Six to 12 months. For investors who have a time horizon longer than six months, I can see this stock punching through $40 and on its way to $50.

TWST: Should Applebee’s be considered a core holding for anyone who is going to be in restaurant stocks?

Mr. Hickok: I consider it a core holding. Some wouldn’t because it had a smaller market cap issue, but it’s $1 billion today. There are only eight or nine restaurant companies that have a market cap of $1 billion or more. It’s a small handful.