Del Frisco’s Restaurant Group Inc (DFRG), Ruth’s Hospitality Group, Inc. (RUTH), Darden Restaurants, Inc. (DRI): Why I’m Changing My Outlook on This Company

One of the fastest-growing brands at Darden Restaurants, Inc. (NYSE:DRI) is Longhorn Steakhouse, but growth is starting to slow. The company will go from 44 new units in 2013 to a planned 37 to 40 in 2014. While slower, these 40 locations could grow Darden’s top line over 2%. This is the lion’s share of the company’s 80-unit 2014 growth plan. Any hiccup here would impact Darden Restaurants, Inc. (NYSE:DRI) in a big way.

While comp sales are important, and a lunch menu contributes to both the top and bottom lines, this growth doesn’t compare to the expansion that comes from new units. Del Frisco’s is outgrowing the competition, and it may also be, as with Longhorn, that competition is slowing while Del Frisco’s is revving up. The company is opening six new locations this year, representing 18% unit growth.

Solid balance sheet

When it comes to these steakhouses, Del Frisco’s has the best balance sheet.

Ruth’s debt-to-equity ratio data by YCharts

Both Darden Restaurants, Inc. (NYSE:DRI) and Bloomin’ Brands have some of the highest debt burdens in the industry. These expenses are fairly common in corporate America, but limit a company’s ability to return value to shareholders since it must be returned to creditors. Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) has smartly been whittling its debt down. Last quarter, it paid off $3 million.

Del Frisco’s approach is to fund new units with cash flow. Last quarter, cash flow from operating activities was $7.9 million. The company also had $0.3 million in expenses related to opening just one store. It doesn’t take much to see that this strategy of growing from cash flow instead of debt is effective. And someday, when the company is done growing, there will be no outstanding liabilities to worry about.

Conclusion

By overcoming tough situations, operating efficiently, opening new restaurants, and sporting a solid balance sheet, Del Frisco’s looks to be a great company to invest in. Having cooled down 17% from July highs, now just might be the time to get in.

The article Why I’m Changing My Outlook on This Company originally appeared on Fool.com and is written by Jon Quast.

Jon Quast has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants (NYSE:DRI).

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