According to SEC filings, activist hedge fund Pleasant Lake Partners recently established a 4.46 million share position in the Del Taco Restaurants Inc (NASDAQ:TACO), good for 11.5% of the common shares. Pleasant Lake’s position in Del Taco Restaurants is a new position, as the hedge fund had no shares of Del Taco in the first quarter.
Besides Pleasant Lake’s recent purchase, other hedge funds have been bullish on Del Taco too. Of Del Taco’s top 10 institutional holders, eight established new positions, one upped its position, and one institution reduced its position by 52.4% in the first quarter. The second largest holder of Del Taco after Pleasant Lake is Moore Capital Management with 1,250,000 shares. Moore Capital upped its holdings by 150% from January to March 31. The third largest holder of Del Taco is Silver Rock Financial with 1 million shares. Silver Rock’s Del Taco position is a new position for the fund. Like Silver Rock, Oskie Capital Management, Wexford Capital Management, Davidson Kempner Capital Management, Boston Partners, Jet Capital Investors, and Claar Advisors all established new positions in the first quarter. Fir Tree is the only institution that reduced its position, having reduced its position by 52.4% to 706,800 shares.
Following hedge fund activity can generate alpha. Our research shows that the 15 most popular small-cap stocks among hedge funds have outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012, and they managed to return more than 144% over the ensuing 2.5+ years and outperformed the S&P 500 Index by over 84 percentage points.
Del Taco Restaurants Inc (NASDAQ:TACO) is a leading Mexican cuisine restaurant chain, with 304 company owned restaurants and 242 franchised restaurants. The company’s growth has been accelerating. Del Taco’s company owned restaurants has had 11 consecutive quarters of same store sales growth, with the company reporting 7.9% same store sales growth in Q1 2015 up from Q4’s 5.9% and Q1 2014’s 4.6%. In addition to same store sales growth, Del Taco will have significant unit growth in the future. Management estimates that there is an in-fill opportunity of over 400 company and franchised restaurants in established markets. With the Hispanic population in the U.S. growing quickly, the long run prospects for Del Taco to successfully expand beyond its established markets in the West coast are favorable too.
Del Taco’s new restaurant return-on-capital metrics are attractive. For a net investment cost of $900,000, management estimates that the company will earn a restaurant contribution margin of 17% and a cash-on-cash return of 25% by year three.
Analysts are bullish. Wedbush has a $19 a share target, and believes that Del Taco deserves at minimum a QSR peer average valuation given Del Taco’s fast same store sales growth and its attractive return on capital metrics. Wedbush also likes Del Taco’s chairman, Larry Levy, who has a long track record of delivering successful growth.
Based on relative valuation, Del Taco Restaurants Inc (NASDAQ:TACO) shares are attractive. With a forward PE of 30, Del Taco trades at a cheaper valuation than Chipotle’s 32 times forward earnings, even though Del Taco will likely grow faster than Chipotle over the next 5 years. With same store growth of upper single digits, Del Taco’s growth is faster than El Pollo Loco, which had a disappointing Q1, with company operated same store sales growth of just 3.4%. With an enterprise value of $592 million and an adjusted EBITDA of $58.8 million, Del Taco’s EV/adjusted EBITDA of 10 is lower than El Pollo Loco’s EV/ 2015 adjusted EBITDA of 12.68 as well.
If Del Taco management can deliver on growth and same store sales remain healthy, Del Taco shares will be a good investment in the long run.
Disclosure: None
