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Will higher gas prices take a bite out of Olive Garden?

Talking Numbers

As fighting intensifies in Iraq, OPEC’s second-largest producer of oil, the price of gasoline in some parts of the United States has reached its highest levels in over a year. And given that gasoline accounts for about 4 percent of the average American’s pre-tax income, will higher prices at the pump take a bite out of casual dining restaurants?

After all, if consumers are spending more at the pump, they presumably have less to spend at the table.

Still, Chad Morganlander, portfolio manager at Stifel’s Washington Crossing Advisors, doesn’t believe slightly higher gas prices will affect Darden Restaurants, the parent company of chains such as Olive Garden, LongHorn Steakhouse and Red Lobster (the last of which it is planning to spin off).

Darden reported earnings Friday of $0.84 per share, $0.10 below estimates. However, it took an expense on Red Lobster as a "discontinued operation".

“I don’t generally think that Darden Restaurants will crater if fuel costs go substantially higher,”  Morganlander said. “The market valuation on this stock is basically in historic range.”

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Morganlander says that should the price of Brent crude oil reach $125 a barrel or should the average price of gasoline in the U.S. reach $4.25 per gallon, then perhaps there may be some drag on consumer spending at restaurants – just not enough to have a big impact on the stocks.

But Morganlander is in no rush to buy Darden at this point.

“I don’t see this as a particularly attractive company,” Morganlander said. “This isn’t a company that we particularly would overweight at this point.”

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Steve Pytlar, chief equity strategist at Prime Executions, sees potential problems in Darden’s chart. Particularly, he is concerned with a rounded top pattern that he believes has beenforming since February, even as an uptrend has been in place since July 2010.

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“This rounded top is indicating a distribution phase,” Pytlar said. “The trend is slowing down and potentially vulnerable.”

According to Pytlar, the markets’ worries are being reflected in the charts. He said that includes qualms about inflation, smaller margins, and lower consumer spending on things including gasoline.  “All of these things can be weighing on a stock,” Pytlar said. “That’s what a rounded top actually exemplifies.  It exemplifies negative headwinds on the stock and investors trying to get out [by] selling their shares.”

That could mean even breaking below the four-year uptrend. “So we’d be negative on the stock,” Pytlar added.

To see the full discussion on Darden Restaurants, with Morganlander on the fundamentals and Pytlar on the technicals, watch the above video.

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