Break Up Darden? Here's Why Barington's 'Fix' Is Not Supportable

By Ronald Thomas, CFA  OCT 21, 2013 2:48 PM

Right now the company does not have the right mix of attributes.

 


I do not see Barington Capital Group’s idea to break up Darden Restaurants (NYSE:DRI) supported by any fundamentals.

Splitting up a company’s low and higher growth segments is a staple of investment banker thinking, based on the expectation that “growth stock” investors are not as smart as “value stock” investors. I have to agree with this perception, because a majority of growth stock investors do not do their homework and will tend to overvalue a stock based on a belief that the duration of high growth will be higher than is possible. Other growth stock portfolio managers, even at some of the nation’s largest mutual funds complexes, will absolutely refuse to look at valuation data (hard to believe, but I assure you that it is true).

But while growth stock investors tend to may be greater fools, you still have to have a number of things right before you can make a break-up strategy work.

The first thing a breakup candidate should have is a stable base of earnings. With Darden, there is none. The company is over-earning. At this point my last note on Darden should be read as background. (See: Darden Restaurants Stock Price Is Seemingly Impervious to Gross Overvaluation.)

Next a candidate for separation needs to have a high growth portion. Here again, there is no such thing.  Last quarter’s same-store sales increase for the non Olive Garden/Red Lobster portion of the company was in the low single digits. Chipotle (NYSE:CMG) and Panera (NASDAQ:PNRA) crazies are not going to get excited by this.

Fitch recently downgraded DRI, and it risks losing its investment-grade status. Quoting from the Fitch release, "Darden’s portfolio of leading casual dining restaurant chains reduces its business risk...." So, break up the company and it likely has junk credit status. Credit for restaurant growth gets more expensive.

And what about monetizing the real estate assets? Barington gave no examples of how this could be done.

 
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.