KeyBanc downgraded two names in the restaurant sector, DineEquity (DIN) and Papa John's (PZZA), to Sector Weight from Overweight. The firm is cautious about DineEquity's new food offerings at its Applebee's chain, and it says that Papa John's valuation now reflects investors' outlook after the stock rose significantly.

LUKEWARM RECEPTION FOR WOOD FIRED: After DineEquity's Applebee's chain launched its Wood Fired Grill Platform earlier this year and its same-restaurant sales fell significantly following the launch, KeyBanc analyst Chris O'Cull initially blamed the declines on the company's failure to promote the launch correctly, he noted today. However, he now believes that "more complex issues" may be at play, including execution and the possibility that the company may not be positioning the launch correctly, he stated. Meanwhile, Applebee's launched a buy one get, one free promotion this week, which will allow customers to buy two entrees for $12.49. That promotion could boost the restaurant chain's sales, but it's "unsustainable" over the longer term, the analyst stated. The analyst expects Applebee's same-restaurant sales to drop about 5% in the next two quarters. DineEquity also owns and franchises the International House of Pancakes concept in family dining.

PAPA JOHN'S: After Papa John's stock rose about $13 between October 28 and yesterday's close to around $87, O'Cull contended that the stock 's valuation is now "reasonable." He thinks that the company's profits could come in above expectations this quarter, and he expects its same-restaurant sales to rise by about 5% going forward. Moreover, O'Cull continues to believe that the company can gain market share from smaller competitors over the longer term, as its digital ordering platform attracts more customers. Additionally, many smaller pizza stores will probably close down as they struggle to remain profitable, O'Cull believes. However, he thinks that the stock "appropriately reflects" investors' 2017 outlook at current levels.

PRICE ACTION: In morning trading, DineEquity dropped about 1% to $84 per share and Papa John's fell 3% to $84.23.