Marshall Hargrave: Many investors are still overlooking a sector that is one of the hottest areas of activism. Here are four stocks to watch that could draw such attention.
No company is safe from activist investors.
Over the past couple of years, activists have taken on some of the most dominant companies in the market. Think Carl Icahn butting heads with Apple Inc. (NASDAQ: AAPL) and Nelson Peltz’s Trian Partners pressing PepsiCo (NYSE: PEP) to split up its beverage and snacks businesses.
One market segment that activists love — but which is often overlooked by investors — is the casual dining space.
This part of the market is fragmented; a number of restaurant companies own multiple brands that could be spun off to unlock value.
Darden Restaurants Inc. (NYSE: DRI) is one example. Darden has had a heated battle with the Starboard Value hedge fund. And its stock is now hitting all-time highs after spinning off the Red Lobster chain earlier this year.
Several other names have also faced recent activist pressure.
BJ’s Restaurants (NASDAQ: BJRI) has Luxor Capital trying to help it boost operational efficiency,Biglari Holdings (NYSE: BH) wants Cracker Barrel Old Country Store (NASDAQ: CBRL) to sell itself, and Sandell Asset Management is trying to get Bob Evans Farms (NASDAQ: BOBE) to split up its businesses.
However, several other casual dining stocks could use some activist love. Here are a couple:
Bloomin’Brands, Inc. (NASDAQ: BLMN) and Red Robin Gourmet Burgers (NASDAQ: RRGB) have been among the worst performers year-to-date in the restaurant space. Their stocks are down 5% and 8% year-to-date, respectively.
Each also has a net profit margin in the low-single digits, which puts them in the bottom quartile of restaurant stocks.
The issue with Bloomin’Brands is lackluster financial performance. Its restaurants operate under five brands, including Outback, Carrabba’s, Bonefish, Flemings’and Roy’s. Could this be an opportunity to spin off underperforming brands? Possibly.
An activist could also push Bloomin’Brands to continue relocating underperforming stores, while also getting more aggressive with international growth via franchising.
Meanwhile, there’s Red Robin, which has over 500 burger restaurants across most of the U.S. However,burger companies haven’t been the easiest restaurant stocks to own.
Red Robin has focused on reducing its debt over the past few years —reducing it by 25% —but declining earnings has forced its stock price down 13% over the last year. This comes as its total operating costs have grown by 12% over the last two years, but sales are up only 4%.
An activist could look at increasing Red Robin’s kitchen efficiency—something Luxor is doing at BJ’s Restaurants —or revamp the company’s menu. The other option is to push Red Robin toward mobile —including digital ordering and mobile payments—in an effort to give it an edge in the competitive burger market.
Besides casual dining, there’s the troubled fast-food space.
A number of years ago Nelson Peltz’s Trian Partners got involved with The Wendy’s Company (NYSE: WEN) and Bill Ackman’s Pershing Square helped bring Burger King Worldwide (NYSE: BKW) public in 2012.
Now, activists are returning to the space. Red Mountain Capital Partners recently took an activist stake in Popeyes Louisiana Kitchen (NASDAQ: PLKI).