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
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.
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