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Will Darden Restaurants, Inc. Surge 35% to $115?

Bret Kenwell

Darden Restaurants, Inc. (NYSE:DRI) has not been trading very well lately. DRI stock is now down 10% over the past month and over 12% so far in 2018. But will that ultimately mark the low? Are shares heading to $115?

If DRI stock does rally to that point — the Street-high price target held by Canaccord analyst Lynne Collier — it would represent a near-35% rally. The chart suggests that won’t be the case, while the fundamentals press us to ask, “why isn’t it there now?”

Let’s take a closer look, starting with the fundamentals.

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Valuing Darden

Analysts expect DRI stock to earn $4.78 per share in 2018, an 18.9% increase from last year. In 2019, they’re looking for another year of double-digit earnings growth, with expectations calling for 13% growth. On the revenue front, they expect growth of 12.5% in 2018 and 4.6% in 2019.

Given the retail environment we’re in now, these are very solid numbers. So what are we paying for this growth? Surprisingly, DRI stock trades at 17.8 times 2018 earnings and just 15.7 times 2019 estimates. Sub-16 times forward earnings for double-digit growth is pretty reasonable. Especially when you consider that DRI stock pays out a 2.95% dividend yield.

Profit margins of about 7% are improving, although operating margins have fallen about 100 basis points over the past year. Another pro/con? Operating cash flow continues to head higher, while free-cash flow has been declining, albeit slightly, over the past twelve months.

However, its EBITDA has been surging, up more than 40% since July 2015.

In a nutshell, we have some pros and cons when it comes to cash flow and margins, but all things considered, they’re pretty good. EBITDA, earnings and revenue are all growing at a healthy clip, the stock pays a solid dividend and shares are reasonably priced.

Trading DRI Stock

That would make the stock’s recent selloff seem a bit overdone, no?

Unfortunately, the charts are more than discouraging. DRI stock has been trending higher for several years, building out a nice trend beginning in October 2016. That trend line (in black) has been support for 18 months, but a few days ago it gave way.

chart of DRI stock price

There are two ways this can go now: DRI stock can rally back above this trend-line and the recent decline turns into a false breakdown. That’s good for bulls. However, if DRI stock retests this level or breaks above it, but fails to hold on and slips below, that’s very bad for bulls. That in fact, will likely embolden the shorts to press their luck and bet on more downside.

Should the latter happen, I would look for a break down to the $77.50 to $80 area.


Right now though, DRI stock is not encouraging. It’s below all three major moving averages as well as trend-line support. Should it get back above its trend-line, look for a rally back to $91 (orange line), a key level in the recent past.

In a nutshell, bulls should wait for DRI stock to recapture its trend-line before going long. Bears can press their bets should shares fail to get back above. Additionally for bears, they can use a move back above this level as their stop-loss.

The Bottom Line for DRI Stock

By and large, the company’s most recent earnings report was pretty good. The company beat on earnings per share estimates, while its revenue miss was so marginal I would consider it an in-line result. Along with its solid fundamental makeup, DRI is a reasonable stock to buy should it get back above trend-line support.

Plus, it’s a great combination of growth and reasonable price.

For instance, it has better growth this year and next year than Cheesecake Factory Inc (NASDAQ:CAKE) and Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL), yet trades with a lower valuation. DRI also has a higher dividend yield than CAKE and is barely below what CBRL pays out. While Brinker International, Inc. (NYSE:EAT) is cheaper and pays out a 4% dividend yield, it has essentially flat revenue growth over the next two years and high-single-digit earnings growth.

If I’m looking in this space, I’d rather pay a premium for the company that’s winning right now. Now, we just need the stock to cooperate.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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