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Bon Appétit: The Street Has Mostly Bullish Reaction To Darden's Q3

Jayson Derrick

Olive Garden's parent company Darden Restaurants, Inc. (NYSE: DRI) reported Thursday with a top-and-bottom line beat in its fiscal third quarter results and lifted its full-year 2019 outlook. The following is a roundup of the Street's reaction.

The Analysts

Morgan Stanley's John Glass maintained an Equal-weight rating on Darden Restaurants with a price target lifted from $112 to $121.

Bank of America Merrill Lynch's Gregory Francfort maintained at Buy with a price target lifted from $120 to $130.

Mizuho Securities' Jeremy Scott maintained at Buy, price target lifted from $125 to $130.

Raymond James' Brian Vaccaro maintained at Market Perform.

Tigress Financial Partners' Ivan Feinseth.

Morgan Stanley: Solid But Slowing Profits

Darden Restaurants benefited in the fiscal third quarter from superior growth in takeout orders, and non-discounting led to top-line growth, Glass said in a research report. Profits at Olive Garden and LongHorn were "solid" in the quarter, but the two chains saw a slowdown from the prior quarter due to higher food costs, the analyst said.

On the other hand, the two other business segments, including dining and "other," showed an acceleration in operating profit growth, he said. 

The company also showed labor leverage for the first time in more than a year, and this should continue —although at lower rates for the next few quarters before reverting to historical sub-1 percent levels, Glass said. Compared to other restaurant chains that struggle with profit flow-through, Darden certainly "stands apart," according to Morgan Stanley. 

View more earnings on DRI

Related Link: Sell-Side Analysts React To Olive Garden Parent Company's Earnings Beat

BofA: Darden Flexing Its Scale

Data from Knapp-Track shows the casual dining segment slowed down modestly in January and February, but Darden ended its February quarter with 2.8-percent systemwide comps growth, Francfort said in a research report.

The analyst said there's "not much to pick at" in the quarterly print, although several trends — including 4-percent average check growth at Olive Garden — are not sustainable over the long term, he said. 

Darden's ability to protect margins and simultaneously show strong top-line growth is in "sharp contrast" to casual dining peers that are mostly struggling in a difficult cost environment, according to BofA.

Mizuho: Company Deserves More Credit

Darden's best-in-class operating fundamentals were reinforced in the quarter and highlighted by a restaurant margin of 23 percent, a figure that rose 40 basis points, Scott said in a research report.

Darden is among the few casual dining chains to upwardly revise its guidance, the analyst said. 

The company deserves credit for managing labor pressure and continuing to offer customers value, Scott said. More credit may be warranted exiting Thursday's report, as labor efficiencies can help drive growth over the next few years and "dissolve market concerns," according to Mizuho. 

Raymond James: Valuation Concerns

Darden's earnings report makes it clear the underlying business trends remain "strong," including holding $300 million of cash but only needing $125 million to run the business, Vaccaro said in a research report. Yet the stock is already trading at a premium valuation, with a P/E more than 19 times calendar year and 11.5 times EV/EBITDA, the analyst said. 

Both of these metrics are at the higher end of the stock's historical three-year average and near the upper end of the group of full-service peers, according to Raymond James. 

Tigress Recommends Buying 

Darden's stock gained nearly 7 percent Thursday after a strong earnings report and a better-than-expected outlook, Feinseth said in his daily newsletter. Encouragingly, the Olive Garden chain has now shown 17 straight quarters of increasing same-store sales through a combination of value-based promotions and new menu items, he said. 

"I believe upside into the high $120 range exists and continue to recommend purchase," the analyst said. 

Price Action

Darden Restaurants stock was up 1.15 percent at $117.44 at the close Friday. 

Related Link: Wedbush No Longer Bearish On Chipotle, Highlights No Negative Catalysts

Latest Ratings for DRI

Date Firm Action From To
Mar 2019 Bank of America Reiterates Buy Buy
Mar 2019 Wells Fargo Maintains Market Perform Market Perform
Mar 2019 Mizuho Maintains Buy Buy

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