THE HEDGEYE EDGE
The Del Frisco’s (DFRG) activist showed up recently, as 9.9% holder Engaged Capital is urging the company to explore strategic alternatives, with the end goal of selling the company.
We see an activist creating value through more appropriate capital allocation, as the current management team has proven to not be great stewards of shareholder capital. Look no further than the Barteca acquisition as evidence of managements lack of discipline on capital allocation. Management leveraged the company up to 4.6x debt/EBITDA (plans to delever to <3.5x within 2-3 years) to purchase Barteca at a multiple of 2.5x sales or 15.7x TTM EV/EBITDA (10.6x FY18 run-rate adj. EBITDA of $31M) as compared to DFRG’s multiple of 8.3x TTM EV/EBITDA at the time of the deal.
The activist’s playbook should focus more on stronger capital allocation to concentrate on eliminating the massive economic risk inherent in the company’s financials. We agree that the stock is intrinsically undervalued. Our sum-of-the-parts analysis suggest buying the stock today in the $6-$7 range and you are essentially getting Del Frisco's Double Eagle for free! The Double Eagle is a highly prized asset in the restaurant space with strong margins and some growth potential.
We think DFRG stock has the potential to double over the next 12-18 months.