Del Frisco's Steakhouse (NASDAQ:DFRG) is a casual dining restaurant chain with massive potential. With a market cap of only $384 million and growing rapidly, DFRG is an interesting pick for the enterprising investor looking for growth amid a turbulent market. With the most recent earnings report showing quarterly YoY revenue growth of 11% and trading at only 16 times forward earnings, the stock looks like an interesting pick in a volatile 2016. With a total market cap of only $350 million, Del Frisco's has virtually unlimited room to continue its expansion, which looks probable considering recent results. But not only is the company performing well on its own and expanding aggressively, it is doing so in an industry that is also continuing to expand with no end in sight.
The company trades at only 1.62 times book value, which means investors are getting all of the value from the brand, goodwill, and business activities at a big discount, because the price the market is offering for the stock is about the same as its net tangible assets. In the words of Benjamin Graham, this provides a margin of safety for the conservative investor that helps him to sleep well at night not having to fear a cataclysmic loss due to one disappointing quarter or bear market. Analysts seem to agree with this assessment, with a consensus estimate of 7 analysts putting up a mean price target of $17.57 a share, which shows over 15% upside from today's price of $15.
The industry is currently enjoying the continued tailwind of low gas prices. With Saudi Arabia, the largest oil producer in OPEC, recently announcing that they will continue to produce oil at high levels despite the global oversupply, prices continue to decline. The more oil prices decline the more consumer discretionary spending increases. In fact, research shows that consumers in America spend up to 80% of their gas savings, and the largest portion of this money is spent at restaurants. It is estimated that the average American spent over $2000 a year on gas before the decline in prices over the past year. If the statistic above is true that we spend 80% of our gas savings and most of that goes to restaurants, then the average person is spending over $1000 year at restaurants - a substantial figure.
The only real concern with this stock is its valuation. Trading at 26 times earnings and only 16 times projected forward earnings, it might look a little expensive. But not many companies outside the tech space are growing at such a fast pace and trading under 30 times earnings. Starbucks (NASDAQ:SBUX), which is growing slower than Del Frisco's, but still trades at 32 times earnings, is being heralded by analysts and investors as a top pick even though it trades at a higher valuation than Del Frisco's, is seeing slower growth, and both are in the consumer discretionary space even if they don't compete directly.
Furthermore, the company has very well-rounded fundamentals with a 6.4% return on equity, 4.24% profit margins, and low debt levels. And while 4.24% margins may not look great to the casual investor, they are actually quite good for the restaurant industry, which has pretty low margins ranging from 2-6%, depending on the sector. So, the company is innovating, growing, and being run well by management, while the stock price is cheaper than its competitors.
Considering all of the above, DFRG looks like a smart growth play in a scary 2016 with stocks going every which way. In this environment, it will be important to pick individual stocks that are likely to outperform the market, and in this case, we are getting both the great performance of Del Frisco's business as well as taking advantage of the positive macro-environmental trend of increased consumer spending from low gas prices. While the stock appears risky due to the valuation, it provides an interesting opportunity for the enterprising investor looking to beat the market in a turbulent 2016.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.