Activist investor Barington Capital urges Darden Restaurants, Inc. (NYSE:DRI) to split into two separate companies.

Darden Restaurants

Hedge fund Barington Capital Group LP is pushing Darden Restaurants, Inc. (NYSE:DRI) to separate its Red Lobster and Olive Garden chains from the rest of its restaurant business.

Darden Restaurants Post Poor Results

Last month, Darden Restaurants, Inc. (NYSE:DRI) posted weak first quarter results for the fiscal year 2014. The company suffered a 37.6 percent decline in net earnings from continuing operations after generating $70.3 million or $0.53 per share.

New York-based Barington Capital, along with other investors, has taken a 2.8 percent stake in Darden, which owns six other restaurant chains besides Olive Green and Red Lobster.

Citing known sources, Dana Mattioli of The Wall Street Journal reports the investor group is pushing Darden Restaurants, Inc. (NYSE:DRI) to create one company with its Olive Garden and Red Lobster restaurants and another with its higher-growth chains that include Capital Grille.

JPMorgan Anticipates Potential Upside

Interestingly, JPMorgan Chase & Co (NYSE:JPM) in its 8th October 2013 report felt Darden Restaurants holds upside potential if an activist or current management initiates strategic changes.

John Ivankoe and team at JPMorgan Chase & Co (NYSE:JPM) feels Darden Restaurants, Inc. (NYSE:DRI) holds potential if management pursues aggressive strategic change with or without the insistence of an activist investor. However, the analysts retained their ‘neutral’ rating on Darden, though they feel the stock may be appropriate for activist/event-driven/special situation investors.

The analysts feel the return to Darden Restaurants, Inc. (NYSE:DRI) shareholders are best achieved not through unit growth, but increasing FCF generation.

JPMorgan Chase & Co (NYSE:JPM)’s analysts pegged Darden’s Dec 14 price target at $52 based on 15 to 16 times EPS, though they feel the company’s share can touch the $59-$61 range, if a radically different strategy is followed—assuming 8 percent F15/F16 average FCF yield. However, the analysts point out that current announced cost cuts and not assuming a great reduction of new unit inefficiencies would push FCF up from their modeled ~$435 million to $560 million in FY 15.

John Ivankoe and team at JPMorgan doesn’t feel the Darden Restaurants, Inc. (NYSE:DRI) brands are dead. The team feels if the company focuses on its existing units, it would allow for better existing store and brand performance.

The analysts feel 1,048 of 2,138 properties of Darden Restaurants, Inc. (NYSE:DRI) could have a fair market value that is closer to the $2.5 billion book value of its debt.