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5 Reasons Why You Should Add Darden (DRI) to Your Portfolio

Zacks Equity Research

One of the largest casual dining restaurant chains, Darden Restaurants, Inc. DRI owns over 1500 outlets in the U.S. and Canada. The company operates through its various brands, which include Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House. This Zacks Rank #2 (Buy) company has good prospects and should make a value addition to your portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings & Revenue Growth

Darden makes for a great pick in terms of Growth investment. Arguably, nothing is more important than earnings growth as surging profit levels is often an indication of strong prospects (and stock price gains) ahead for the company in question.

While Darden has put up a historical EPS growth rate of 12%, compared with the industry average of 11.4%, investors should really focus on the projected growth. Here, the company is looking to grow at a rate of 11.2%, while the Zacks categorized Retail-Restaurants industry’s average calls for EPS growth of just 8.2%.

In order to boost the performance of the Olive Garden brand, the company is implementing a set of initiatives under its Brand Renaissance Plan. These include simplifying kitchen systems, improving sales planning and scheduling, impeccable execution in the restaurants to improve guest experience, developing new core menu items, allowing customization and making smarter promotional investments. Further, the company is also focusing on remodeling of its outlets to attract guests.

Meanwhile, sales of the company have also witnessed a boost via its technology-driven initiatives such as system wide rollout of tablets and the launch of mobile ordering. Olive Garden’s To Go business and the company’s launch of catering in the U.S. are also expected to add vastly to the top line.

At LongHorn, the company strives to attract its guests by focusing on core menu, culinary innovation and providing regional flavors, as well as improving guest experience through better in-restaurant execution. Owing to these efforts, segment comps have outperformed the industry for the past 15 consecutive quarters.

Notably, the company’s sales growth in fiscal 2017 is projected to be about 2%.

For all these reasons the company currently has a Growth Score of ‘B’ on our style score system that helps us to identify potential outperformers.

Valuation Looks Rational

Darden has a Value Style Score of ‘B.’ The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount.

The company is currently trading at a trailing 12-months P/E multiple of 19.69x while the industry’s average stands at 24.06x. Moreover, its forward P/E ratio (price compared to this year’s earnings) stands lower at 19.31. This indicates that a slightly more value-oriented path may be ahead for Darden.

Looking at the sales of the company, the company is currently trading at a P/S ratio of 1.35, significantly lower than the industry average which stands at 3.33. Some people like this metric more than other value-focused ones because sales are harder to manipulate with accounting tricks than earnings.

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. Darden has a P/CF of 13.37, lower than the industry’s average of 16.23.

All these ratios deem the company undervalued in comparison with its industry peers and thus indicate a good time to buy.

Stock Price & Other Returns

Shares of Darden have returned over 12% in the last one year, comparing favorably with the industry’s fall of 5.2%. While any stock can see a spike in price, it takes a real winner to consistently outperform the market. That said, we noticed that Darden has outperformed the industry in each of 4-week, 12-week and 52-week time frames.

Furthermore, the Return on Equity delivered in the trailing 12 months was an impressive 22.9%, while the industry returned 9.6%. The company continues to focus on an aggressive cost management plan, under which it has been able to significantly cut operating costs. Since Oct 2014, the company has identified costs efficiencies that would lead to total cumulative savings in the range of $145 million to $165 million by fiscal 2017. Amid the current soft environment, such efforts to control costs would help to improve margins and thereby perk up returns.

Additionally, Darden continues to return wealth to shareholders via dividends. The company has continuously paid semi-annual or quarterly dividends since it announced its first dividend in 1996 and has also hiked it several times since then.

Earnings History and Future Estimates

Darden has remarkably beaten earnings estimates in each of the trailing nine quarters, recording an average beat of 2.57% in the last four quarters.

Furthermore, over the past 60 days, the company has been seeing a slightly upward trend in earnings estimate revision for 2017 and 2018. These positive earnings estimate revisions indicate analysts’ confidence in the stock and also add to the optimism

Low Beta Stock

A stock with beta less than 1 suggests that the price movement of the stock is not highly correlated with the market. Since they are less volatile than the market, they are safer bets at the moment. Darden has an impressive beta of 0.23. Adding it to your portfolio brings down your portfolio’s overall beta considerably, thereby reducing its risk.

Bottom Line

Darden is expected to perform well in the quarters ahead, given its strong fundamentals. However, investors should be cautious of the company’s non-franchised model, which makes it susceptible to increased expenses. Additionally, a challenging sales environment coupled with increasing labor expenses is hurting most restaurateurs including Brinker International, Inc. EAT, YUM! Brands, Inc. YUM and Panera Bread Company PNRA, to name a few. Furthermore, Darden’s limited international presence though saving it from forex losses and global uncertainties, limits the company’s brand reach. Nevertheless, we are positive on the stock’s prospects going ahead, and its ability to hedge overall risk of the portfolio.

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Panera Bread Company (PNRA): Free Stock Analysis Report
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