The stock price of Darden Restaurants, the company that owns popular chains such as Olive Garden and Longhorn Steakhouse, might have already seen its best days.
Darden Restaurants announced on Monday that it is buying Texas-based restaurant chain Cheddar’s Scratch Kitchen for $US780 million. The news boosted the stock price by about 9%, but a group of Credit Suisse analysts warn that continued upside is limited.
“DRI continues to stand out as a best-inclass operator within casual dining but we believe upside to the stock is limited,” the bank said.
According to Credit Suisse, the stock’s valuation fully captures their most reasonable “blue sky scenario,” that is to say the firm’s current valuation is at the bank’s forecasted ceiling. The bank also said the firm’s acquisition of Cheddar’s has some issues:
“We see several potential issues with Cheddar’s, including uncertain growth outlook (unit count is flattish since 2015), potential cannibalization of Olive Garden (mgmt. cited OG as a primary competitor to Cheddar’s) and risk of distracting mgmt. from focusing on driving share gains at other brands.”
But that’s not all.
The bank also pointed out that same-store sales at Darden’s Longhorn Steakhouse have slowed for several quarters.
As such, Credit Suisse has as a price target of $US74, below its current price of $US82.53.