Will Darden Deliver a Christmas Present to Shareholders?

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Darden Restaurants Inc. (DRI) share price, year to date, rose 21%, which is impressive. Brands included in the Darden chain of restaurants include Olive Garden, Longhorn Steakhouse, Eddie Vs and a few others.

Across the board, year to date, Darden’s restaurant sales increased 1.3%. Olive Garden’s sales rose 2%, to $961 million, while Longhorn Steakhouse rose a mere 0.6%, to $386 million. Traffic at both brands was down, 1.3% at Longhorn Steakhouse and 1% at Olive Garden.

At the beginning of October 2016, Darden announced it would be buying back shares. The company bought back 7.2 million shares for $396 million. In 2017, Darden expects total sales growth to hit 1.7% to 2.7%, with earnings per share ranging from $3.87 to $3.97.

Darden will report earnings for the current quarter right before Christmas. Analysts expect earnings per share of $0.63, up 16% from $0.54, year over year. If the earnings per share do indeed hit $0.63, the company’s profit will be $77.18 million, with a price to earnings ratio of 30.9. A 30.9 price to earnings ratio is scary, but in this case is indicative of only a single quarter and carries little weight. Compared to the previous quarter’s earnings per share of $0.88, $0.63 per share would be a drop of 28%. However, remember that analysts tend to fixate on earnings per share, which is not always indicative of future growth.

On the bright side, management has reduced operational costs and continues to spin off low-margin assets. The company sold Red Lobster in 2014, and there are rumors that Darden might spin off or sell Eddie Vs and Capital Grille. The company is increasing its online presence, making it easier for consumers to order online. Online profits are significantly higher. And Darden is increasing its catering business.

At the present juncture, Darden’s share price sits at $76. For 2017, bullish analysts put Darden’s share price at $80, while the pessimists put it at $50. Darden’s yearly dividend yield is 2.9% and some analysts believe it could hit 3.1% in 2017, if the company grows.

Alexander Valtsev points out that over the last twenty-one year period, the company’s share price increased 960%, an average growth rate of 12% per year. Valtsev expects Darden’s revenue growth in 2017 to hover at 1.5%, which is not great news. But at least it’s not negative growth. Regarding margins, Darden’s net profit margin is 5.7% and trending upward, with free cash flow in the 6% range.

What’s so interesting about Valtsev’s analysis is that he concludes that Darden is undervalued at its present share price. He believes the share price should be closer to $81 because Darden’s existing enterprise multiple ratio sits at 9.5x, whereas the industry average is 12.7x.

Based on Valtsev’s analysis, along with bullish analysts’ projections that Darden will experience growth of 5% per year for the next five years, Darden looks like a good investment. Investors should look for slow, steady growth in revenue. Payouts should remain at 2.9% per year, with the possibility of a slight increase in 2017-2018.

 

Randy Radic analyzes public food company stocks for the Exception Magazine and has contributed to other financial publications like Seeking Alpha.