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Ruby Tuesday, Inc. Message Board

  • the_raven_35 the_raven_35 Oct 1, 2009 10:12 AM Flag

    Darden News (DRI)...Pressuring RT?

    Just looking at DRI, which announced that earnings will trend toward the lower end of its guidance range...stock traded down strongly on the news, and is still off a little today. I'd be more concerned if economic news had turned incrementally poorer...but it has not, and likely will not either.

    However, DRI trades for about 6-6.5x cash flow for fiscal 2010 and 2011 (nearly the same quarterly period as RT, which makes forward valuation a sane exercise), while RT is still languishing at 5x cash flow. Also interesting is that analysts were expecting cash flow growth from DRI, but RT is expected to be flat. I know DRI has been a solid performer, but I've never quite understood why. Olive Garden and Red Lobster are clearly a bit higher on the casual dining food chain than RT, but I'm not sure I'd bet on higher price points at this point in the economic cycle anyhow, let alone growth. So this looks more to me like analysts covering the stock got a bit ahead of themselves in estimates versus a fundamental flaw in the operating business at DRI. Part of the conundrum of owning a higher multiple doesn't have to be as disappointing to crater the stock because expectations are clearly ahead of the story anyhow.

    That said, DRI still looks absolutely cheap to me at 6x cash flow, so I'm thinking that this actually might be an attractive entry point. Compared with BWLD, which trades for 7x+ cash flow, and is literally no better than RT, both RT and DRI look very cheap.

    I would bet RT trades sideways for the next week, and then the earnings report next week will potentially propel the stock higher...because there is clearly NO LOFTY EXPECTATIONS for this name, so any incremental bit of good news should help trading substantially. I think people are going to be floored when they see how much debt RT has paid down.

    DRI, by the way, yields 3%. I think eventually RT will re-instate a $0.35 per share dividend, hopefully within the year. They used to pay $0.70. At current prices, that translates to about a 4% dividend. If the yield were more in line with DRI, you have 33% appreciation in the stock pricing coming.



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