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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).
And keeping with the trend of tackling some of the world’s largest companies, Jana Partners recently revealed that it took a new position in McDonald’s Corp. (NYSE: MCD). Jana Partners hasn’t revealed its plans for McDonald’s.
Within the fast-food space, two stocks could attract activist investors:
First is Yum! Brands (NYSE: YUM), which owns the KFC, Pizza Hut and Taco Bell brands.
Yum’s stock price has been flat for the last year, due to concerns in China. What an activist could do is look to separate Yum’s U.S. and international businesses.
This would allow the company to focus on growing its Pizza Hut business and continuing to innovate with Taco Bell (think: breakfast menu) in the U.S. Meanwhile, that would leave a separate fast growing KFC China business that could focus on navigating the ever changing market overseas. This would be a big benefit to investors, who would have the choice of investing in the riskier international business if they wanted.
Jack in the Box Inc. (NASDAQ: JACK) could also draw the attention of activists. The company runs two very different businesses: its staple fast-food chain, Jack in the Box, and Chipotle rival Qdoba.
Shares of Jack in the Box are up 50% year-to-date. And the stock isn’t cheap, trading with a price-to-earnings ratio of 33. This comes as Jack in the Box has been a big success with its 24-hour restaurants that serve not only burgers, but egg rolls, taco and various other foods.
Activists might find value in Jack in the Box by spinning off the Qdoba brand. I find it hard to see Qdoba being able to take market share from Chipotle, and in some ways Qdoba could be holding back Jack in the Box.
Without Qdoba, Jack in the Box shares could be priced even higher — as a unique restaurant concept with plenty of room left to grow. It operates roughly 2,200 Jack in the Box restaurants, compared to the 13,000 that Burger King has and 6,500 for Wendy’s.
While there’s no guarantee an activist will come calling on any of these four stocks, each look to be ripe for change. This means that now could just the time for investors to take a closer look.
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