Is Darden Restaurants a Bargain Here?

With shares of Darden Restaurants (NYSE:DRI) trading at around $45.15, is DRI an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

dardenDarden Restaurants has been a great investment since its IPO, but that kind of consistent stock performance might be in jeopardy. A while back, it was reported that Darden Restaurants would cut employee hours to avoid healthcare costs. This negative press then supposedly led to a profit decline. There is a lot of confusion as to who said what with this story, but the bottom line is that it didn’t lead to anything good. This was a big misstep in 2012, but it wasn’t the end of the bad news for Darden Restaurants. In December, the company announced that sales growth for 2013 was expected to come in between 7.5 percent and 8.5 percent. Investors didn’t receive this news well, and the stock plummeted. Now, the question becomes whether or not that has presented an opportunity. Since the stock hasn’t moved much since, the answer would appear to be no. However, we should still investigate a little further.

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If you’re not familiar with Darden Restaurants, it operates Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s Prime Seafood, and Wildfish Seafood Grille. There are approximately 2,000 restaurants overall with Olive Garden representing about 45 percent of total sales. Olive Garden is known to be a more affordable option to traditional Italian restaurants, but for one example, their Chicken Parmigiana dinner entrée costs $14.95. That’s very similar to what you will find at the average Italian restaurant. Once diners catch on to this, which they might have begun to do already, it’s not going to be good news for Olive Garden. Traffic has slowed as of late.

Let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Weak          

The debt-to-equity ratio for Darden Restaurants is weak, but it’s not terribly weak for the industry. The balance sheet is also in poor condition. At least cash flow is good. Darden Restaurants currently has $949.10 million in operating cash flow.

Debt-To-Equity

Cash

Long-Term Debt

DRI

1.57

$61.40 Million

$2.93 Billion

DIN

5.21

$71.84 Million

$1.47 Billion

YUM

1.27

$776.00 Million

$2.94 Billion

 

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T = Technicals on the Stock Chart Are Weak   

Approximately three years ago, three trains left a station. Two were traveling at warp speed while the other took its time smelling the roses and enjoying the white puffy clouds in the sky. The only financial advantage to traveling on the slower train was that you were paid a healthy guaranteed amount of money just for traveling. Darden Restaurants yields 4.40 percent. Yum! Brands (NYSE:YUM) yields 2.10 percent. DineEquity (NYSE:DIN) doesn’t offer any yield.

1 Month

Year-To-Date

1 Year

3 Year

DRI

-0.51%

1.28%

-8.63%

22.18%

DIN

6.00%

12.51%

50.91%

168.10%

YUM

-1.78%

-3.13%

-0.05%

101.70%

 

At $45.15, Darden Restaurants is currently trading below all its averages.     

50-Day SMA

45.97

100-Day SMA

49.77

200-Day SMA

50.72

 

E = Earnings Have Been Steady                 

Earnings have been steady on an annual basis. Revenue hasn’t been as consistent over the past five years, but we still see a solid upward trend. However, due to conditions that will be discussed in the Trends section, it will be difficult for Darden Restaurants to show strong improvements in both areas in 2013.

2008

2009

2010

2011

2012

Revenue ($)in billions

6.63

7.22

7.11

7.50

7.99

Diluted EPS ($)

2.60

2.65

2.84

3.39

3.57

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue, but a decline in earnings.

11/2011

2/2012

5/2012

8/2012

11/2012

Revenue ($)in billions

1.83

2.16

2.07

2.04

1.96

Diluted EPS ($)

0.40

1.25

1.14

0.85

0.26

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

With food costs increasing and consumers having less discretionary income than in the past, it’s difficult to see strong growth throughout the industry in the near future.

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Conclusion

Darden Restaurants has average margins, strong cash flow, and a forward P/E of 12.01. The short position is relatively high at 5.20 percent. However, the most important stat for Darden Restaurants is the 4.40 percent yield. As long as that number remains high, Darden Restaurants should be on any investor’s radar. On the other hand, the current economic environment doesn’t lead to Darden Restaurants being a top-notch option at this time.

Darden Restaurants is a WAIT AND SEE.

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