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Del Frisco's Looks Overdone

Despite its earnings beat, the prospects for its secondary offering don't look great.
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Last night, the steak chain Del Frisco's Restaurant Group (DFRG) reported earnings of $0.20 per share, slightly better than the expected $0.19. After that better-than-expected report, Del Frisco's announced that it filed a registration statement with the Securities and Exchange Commission in connection with a proposed secondary public offering of 5 million shares.

That announcement was not surprising, given the company's IPO almost a year ago, though I have to admit I am rather surprised by the company's ability to deliver better-than-expected results, given the economic landscape.

What surprises me even more is how the shares have climbed more than 32% in the last three months, compared with just over 8% for the S&P 500. Of course, since Del Frisco's shares now trade at more than 22x 2013 consensus earnings estimates of $0.96 per share, its secondary offering makes sense for the company.

But does it make sense for the investor? My answer to that remains "no."

We're seeing gasoline prices rise once again, corn prices are also on the rise, given renewed concern of the coming crop, and we've heard from both Coca-Cola (KO) and L'Oreal about stalling U.S sales. Moreover, the current valuation on the shares is stretched, compared with the shares of Ruth's Hospitality (RUTH), Brinker International (EAT) and DineEquity (DIN), which offer better valuations and better earnings growth prospects in the coming quarters.

Said another way, investors would need to see earnings growth on par with that expected from Buffalo Wild Wings (BWLD) and Ignite Restaurant Group (IRG) at Del Frisco's in order to see meaningful upside from current levels. Currently, the market expects Buffalo Wild Wings to increase earnings 22% in 2014 over 2013, and expects Ignite to gain 32%. That compares with 14% for Del Frisco's, and we have to determine whether the pending secondary offering from Del Frisco's will be dilutive to those expectations.

If I wanted to invest in the casual dining space, I'd be looking for companies that have mismatched earnings growth expectations and P/E valuations relative to the group. Examples would be aforementioned DineEquity and Ignite Restaurant Group, both of which are trading below expected earnings growth on a P/E basis. Again, that's if I wanted to invest in the group. We have to remember that there are thousands of stocks out there.

My preference has been to play the food chain or ecosystem in such a way that I can get the greatest end-market exposure and not worry about any one particular player. That's been my strategy in mobile phones, smartphones and tablets, and it also stands here. That means companies such as McCormick (MKC), which has been a champ over the last year, as well as another favorite, International Flavors & Fragrances (IFF).

Of those two, IFF has a better combination of growth relative to valuation, given McCormick's current multiple of more than 22x 2013 consensus expectations and projected 10% earnings growth in 2014. Given recent warnings of a slowing growth, I would hold off from adding IFF until the company reports its second-quarter results in early August.

At the time of publication, Versace had no positions in stocks mentioned.