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Small-Cap Buy: Del Frisco's Restaurant Group

- By Jonathan Poland

Recent acquisitions and the debt incurred has sent the stock to all-time lows. That's the good news. The great news is that investors are still getting in years before this company's growth story plays out.

Del Frisco's Restaurant Group (DFRG) owns and operates over 80 restaurant locations across the U.S. Its Double Eagle Steak House accounts for about half of the company's top-line revenue. But the company has been bolting on growth assets. Over the summer, Del Frisco acquired Barteca Restaurant Group for the Barcelona Wine Bar and Bartaco fast casual restaurants. This acquisition adds almost $128 million on the top line and over $31 million in Ebita, but it came at a price of $325 million. See the press release here.

In September the company sold its Sullivan's Steakhouse to Romano's Macaroni Grill for $32 million with CEO Norman Abdallah giving this boilerplate statement:

"The sale of Sullivan's Steakhouse enhances our financial condition while enabling us to sharpen our focus on opportunities with the highest potential for strong returns. These include executing our Emerging Brands integration and expanding our core concepts of Del Frisco's Double Eagle Steakhouse, Barcelona Wine Bar and bartaco. We wish our colleagues at Sullivan's Steakhouse all the best under their new ownership."

The truth is that after its Barteca acquisition, Del Frisco is in need of cash in order to realize the goal of 100 Barcelona and 300 Bartaco locations domestically, when there are currently just 31 combined. And, the company's free cash flow does not look good at all -- running negative in six of the last seven years.


Expansion is hard and costly, but since ValueLine recommended this stock in June with a $25 price target, it has been cut in half. Now it trades at 70% of book value and has two growth assets to build upon. After almost a decade of slow growth, the company is in a position to generate north of $500 million in sales during 2019 at higher margins than before thanks to the Barteca buyout.

The market has unfairly punished the company, driving its capitalization down to $213 million. Valued at 40% of its sales, Del Frisco's is priced more like a one-off small business rather than a national chain with massive growth potential.

If successful, having 100 Barcelona Win Bar locations would theoretically bring in $400 million in sales at 20% Ebita, $100 million pre-tax profit. And, if there are 300 Bartaco locations with the same metrics, that would tack on $1.2 billion in revenue and $250 million in before-tax earnings. Collectively that would be 60% higher than today's market capitalization. However, to get there requires money and discipline. Only time will tell if Del Frisco has what it takes or not.

Disclosure: I am not long/short Del Frisco's .

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This article first appeared on GuruFocus.