NEW YORK (TheStreet) -- Darden Restaurants (DRI - Get Report) stock is lower Friday after announcing it will sell seafood chain Red Lobster to private equity firm Golden Gate Capital in a deal worth $2.1 billion.
This comes despite warnings from activist investors including Starboard Value and Barington Capital that a sale would curtail shareholder value.
By midafternoon, shares had tumbled 3.1% to $49.12.
Red Lobster, one of its more mature brands, has been struggling in recent times, undercut by competition from fast-casual restaurants such as Chipotle (CMG). However, though same-restaurant sales have fallen, Red Lobster still accounts for nearly a third of Darden's total annual revenue.
The deal, expected to close in the first quarter of 2015, will generate net proceeds of $1.6 billion, portions of which will be used to pay back debt and for share buyback programs.
TheStreet Ratings team rates DARDEN RESTAURANTS INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate DARDEN RESTAURANTS INC (DRI) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. Among the primary strengths of the company is its reasonable valuation levels, considering its current price compared to earnings, book value and other measures. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Regardless of the drop in revenue, the company managed to outperform against the industry average of 3.8%. Since the same quarter one year prior, revenues slightly dropped by 1.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, DRI has underperformed the S&P 500 Index, declining 7.38% from its price level of one year ago. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
- Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market on the basis of return on equity, DARDEN RESTAURANTS INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- Net operating cash flow has decreased to $363.70 million or 13.87% when compared to the same quarter last year. Despite a decrease in cash flow of 13.87%, DARDEN RESTAURANTS INC is in line with the industry average cash flow growth rate of -22.05%.
- You can view the full analysis from the report here: DRI Ratings Report