This post is part of the Reporter’s Notebook blog.
Wall Street didn’t take too kindly to the earnings report from Del Frisco’s Restaurant Group on Thursday.
The Southlake, Tex.-based steakhouse chain operator missed earnings projections in its second quarter, and then reduced its projections for sales and cash flow for the rest of the year. Investors hate both, and the stock plunged by more than 17 percent.
That could well make the company a takeover target.
Paul Westra, analyst at Stifel, suggested in a note this morning that the stock price decline and lowered guidance increases the “probability” of a go-private transaction.
This isn’t the first time that Westra suggested the company could go private. He made the suggestion in February after disappointing earnings then, based on valuation.
That valuation has only declined since. Del Frisco’s stock is down more than 40 percent to date amid sales and profit concerns. Even before the day began, Del Frisco’s had among the lowest valuations among restaurant companies on Wall Street. It had an enterprise value of 9 times cash flow, well below average for a restaurant company at the moment.
In general, a multiple of 10 or lower makes a company a more desirable target for private equity groups and others looking to make an acquisition, because investors typically don’t like to pay much more than that (unless the concept is a small growth concept).
Del Frisco’s has some other elements that could make it an attractive target in a take-private deal. It has no debt, for one thing, and its restaurants have high volumes and serve a popular item, steak.
With a low valuation, buyers could sense an opportunity to take it private, perhaps with debt, find a way to fix sales and improve earnings and perhaps bring it back to the public markets at a later date.