Takeaway: It's not cheap being an American consumer these days.
We added DFRG to our Best Ideas list as a SHORT on 06/05/2014 at $27.27/share.
Last week, we released a 67 page Black Book detailing why we believe DFRG is a short. The following note is a very brief summary of our presentation. If you would like more information or a copy of the deck, please email us.
Our short thesis centers on three critical themes:
- Slowing Trends, Declining Margins – Company-owned two-year same-store sales and traffic have been decelerating steadily since 3Q11. Meanwhile, restaurant level margins (LTM) and operating margins (LTM) have been declining since 2Q12.
- A Portfolio In Flux – Del Frisco’s Double Eagle Steakhouse is a robust concept, but two-year same-store sales and traffic are decelerating. The Sullivan’s concept is broken. Grille is, at this point, nothing more than an unproven growth concept.
- Materially Mispriced – At 28.22x P/E (FY14) and 13.39x EV/EBITA (FY14), we believe DFRG is materially mispriced and fails to discount slowing trends, declining margins, rising commodity costs and other issues we’ve identified. Our SOTP analysis suggests significant downside.
As always, we like to put duration into context with all our longs and shorts.
Over the past two years, DFRG has outperformed the SPX and its Peers by 70% and 62%, respectively.
The financial performance of DFRG revolves around the performance of Del Frisco’s concept, with the brand generating 48.9% and 62.3% of revenues and restaurant level EBITDA, respectively.
What are the bulls saying?
Same-store sales are decelerating and remodels are not the panacea for Sullivan’s.
DFRG’s premium valuation is driven by the potential growth of the Grille concept. With only 11 units, it is premature to call Grille a viable growth vehicle. In addition, sister concepts traditionally have a poor track record.
Management is still trying to understand its target market for the Grille and appears unsure of what locations to select.
At 17.6%, Grille’s restaurant level margins are 1100 bps below that of Del Frisco’s. This will continue to pressure the margin structure of the company, particularly with management’s current growth plans.
The Street loves the company.
But management has struggled to deliver on sales and earnings expectations.
DFRG is trading near its all-time peak on several valuation fronts.
Using a generous sum-of-the-parts valuation analysis, we find that the stock is grossly overvalued.
Call with questions.
Restaurant analyst Howard Penney details the three key reasons why he’s short the stock of Del Frisco’s, a high-end casual dining steak chain.
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Takeaway: Nine specific investing behaviors that are almost guaranteed to decrease your chances of success. Courtesy of the SEC.
By Moshe Silver
The SEC wants to remind you, Mr. & Mrs. Average Investor, that it really does care about you. Earlier today, the Commission tweeted out a reprise of a 2010 report produced by the Library of Congress, at the request of the SEC Office of Investor Education and Advocacy. The report highlights nine major reasons that your investment portfolio routinely underperforms.
For all our jaded skepticism about the SEC, their investor education pieces often point to real issues that plague private investors in their quest for profits and financial stability. While today’s tweet doesn’t tell you how to invest successfully, it does tell you nine specific investing behaviors that are almost guaranteed to decrease your chances of success. For that alone, it’s worth a look.
Today’s tweet is aimed at individual investors. Bur here’s a tip from the Dark Side of Wall Street: the same behavioral patterns that have consistently made you a losing investor in the markets also plague the majority of investment professionals. That’s why hedge funds as a class generally can’t outperform the broad market averages, or each other. (See, for example, “Hedge Funds Trail Stocks For Fifth Year With 7.4% Return,” Bloomberg, 8 January 2014). The article notes that “hedge funds last beat US stocks in 2008,” by losing less than the broad market (hedge funds down 19% as a group, versus a 37% decline in the S&P 500 – do you feel better now…?)
Active Trading: Says the SEC, “the Report concludes that active trading generally results in the underperformance of an investor’s portfolio.” Excessive turnover in your trading account hasn’t led to outsize profits – but it has contributed to the profits of the high-frequency traders. Thanks for playing.
Disposition Effect: Holding onto your losers, and selling your winners.
Focusing on Past Performance of Mutual Funds, While Ignoring Fees: Past annualized returns, as every prospectus is required to warn you, are not a guarantee of future results. But heads up: past management fees, transaction costs and expense ratios generally are an accurate guide to what the managers of a fund will be taking out of your pocket, meaning no matter how well or poorly they do this year, you still have to claw your way back from that added 1%, 2%, 3%, or even more before you start actually generating profits. If your mutual fund hits the hedge fund average of 7.4%, as noted by Bloomberg, but you pay 2.5% in expenses, how well did you actually do? Are you smarter than a fourth grader?
Familiarity Bias: People “tend to favor investments from the investor’s own country, region, state or company.” “I only invest in what I know” is a form of self-inflicted affinity fraud. This lazy approach leads to a haphazard and lopsided portfolio with no strategic plan.
Manias and Panics: The reason markets make bubbles is because everyone rushes in to buy as the price inflates. The faster the price inflates, the more buyers panic and rush in. When the last hysterical buyer has bought, there’s no one left to buy. “Pop!” goes the bubble. Tulip bulbs, anyone?
Momentum Investing: The financial equivalent of not looking at a weather forecast. “Tomorrow is likely to be just like today,” you reason. “Stocks went up today, so they’ll go up tomorrow. I can buy them now on the way up, and I’ll sell them before they go down.” ‘Nuff sed…
Naïve Diversification: You’ve been told you should diversify your portfolio, so you put 10% of your money into each of ten different investments without regard for varying levels of risk, broad market forces, or the potential for interactions that may magnify risks across the investments you have chosen. “Diversification” doesn’t mean “buy lots of stuff.” It means “buy a lot of uncorrelated stuff” so your holdings won’t all go up or down together.
Noise Trading: Following trends after they have become widely known. If the headline on the front page of the financial section screams “Gold At All-Time High!” and you rush out and buy gold, you are a noise trader. Says the Commission, you “have poor timing, follow trends, and overreact to good and bad news in the market.”
Inadequate Diversification: Last but not least, the Report identifies a tendency on the part of investors to buy a number of different stocks, but all in the same one or two sectors. Buying five transportation stocks and seven natural resources stocks is not diversification. If anything, it is excessively concentrating your portfolio in two closely correlated sectors. It’s almost the equivalent of buying one stock, closing your eyes, and hoping for the best.
Moshe Silver is chief compliance officer at Hedgeye and author of Fixing a Broken Wall Street.
Takeaway: Builder confidence bounces in June, but only so far. Confidence remains well below its 51-58 range seen in 2H13.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: NAHB HMI (Builder Confidence Survey)
This month, the NAHB’s HMI, which measures builder confidence, rose to 49, a gain of four points from May's print of 45 (which was not subject to any revision). For reference, last month's 45 print was the lowest reading in the last 12 months.
- Headline: Modest bounce but the Good/Bad delineation line is 50 – so less worse remains the more apt descriptor of the prevailing reality than ‘accelerating recovery’. The June reading of 49 marks the 5th consecutive month below 50
- Sub-indices: All three index components gained on the month with current sales leading gainers at +6 pts sequentially.
- Regional: West/South/Midwest all bounced MoM while the Northeast reversed two months of sequential gains. On a 3M rolling average basis (NAHB's preferred read) all regions ticked up moderately with the exception of the Midwest.
- The Homebuilder “Optimism Spread” (6M estimates less Current Traffic) remains near post recession peak levels.
Following four consecutive months of decline/stagnation, builder confidence finally caught a bounce in this most recent survey.
NAHB Chairman Kevin Kelly had this to say:
“After several months of little fluctuation, a four-point uptick in builder sentiment is a welcome sign and shows some renewed confidence in the industry. However, builders are facing strong headwinds, including the limited availability of labor.”
While NAHB's Chief Economist, David Crowe, added this:
“Consumers are still hesitant, and are waiting for clear signals of full-fledged economic recovery before making a home purchase. Builders are reacting accordingly, and are moving cautiously in adding inventory.”
From June 2013 through January 2014, the NAHB index was in clear recovery/improvement territory with readings of 51-58. While this morning's print is an improvement, it still falls well short of 2H13 levels and remains below the 50 line.
About the NAHB HMI:
The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.
Joshua Steiner, CFA
Christian B. Drake
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
European Financial CDS - Greek bank swaps continued to dive last week, falling an average of 70 bps on the week and dropping by an average of 116 bps on the month. Outside of Greece, European banks swaps were tighter by ~2 bps w/w and 16 bps m/m.
Sovereign CDS – Sovereign swaps tightened across the board last week with the sole exception of the US. Irish sovereign swaps tightened by -13.5% (-6 bps to 41 ). Meanwhile, US sovereign swaps widened by 1 bps to 17.
Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 20 bps.
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