Activist Track: Pirates of the Outback

It's almost funny how much activist hedge funds like casual dining and fast-food restaurants. Out of the 11,000 companies out there, is this category really so poorly managed and undervalued that the activists gravitate toward the space? Or perhaps it's a function of "buy what you understand," and everyone understands a Big Mac.

Personally, I haven't been a big fan of Outback Steakhouse, which is owned by OSI Restaurant Partners (OSI - commentary - Cramer's Take). I took my two kids there last year and I really didn't like it. I much prefer other activist favorites like Chuck E. Cheese or even Denny's. But clearly, Warren Buffett disagrees. He owns 1.8 million shares of Outback.

And this past week, Pirate Capital, whose activist efforts I've written about repeatedly, got involved in OSI.

OSI is the third-largest operator of casual dining spots, operating 1,298 restaurants in the U.S. and 21 other countries. Of these restaurants, 86%, or 1,137, are company-owned. Some of its most popular restaurant chains are the aforementioned Outback (775 domestic and 140 international locations), Carraba's Italian Grill restaurants (200 locations), Bonefish Grill (90 locations), Cheeseburger in Paradise (two locations), Fleming's Prime Steakhouses (39 locations), and Roy's (20 locations).

OSI's top competitors, which account for the top two operators of casual dining spots, are Darden Restaurants (DRI - commentary - Cramer's Take) and Brinker International (EAT - commentary - Cramer's Take).

Most recently, OSI has experienced a 2.6% decline in same-store sales but it's unclear if this is a useful operating metric. As Eddie Lampert has pointed out when looking at Sears Holdings' (SHLD - commentary - Cramer's Take) same-store sales, it's easy to boost them in any particular year by making sure you open up a bunch of stores in the prior year. Most stores, no matter how bad, will show a huge increase in same-store sales from the first to second years, artificially boosting the number.

In fact, the fastest growing parts of the OSI empire are its newer brands: Sales at chains such as Bonefish Grill and Fleming's Prime Steakhouse rose by 1.7% and 7.4%, respectively.

On June 5, Pirate Capital filed a 13D stating that it holds 5.30% of the total common stock of OSI Restaurant Partners. In the filing, Pirate said it believes that "the market price of OSI shares fails to reflect the value embedded in the Carrabba's, Bonefish Grill and Fleming's concepts, the potential for margin recovery at the core Outback concept and the significant value in the Company's real estate portfolio." Click here for the full filing.

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At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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