Darden Restaurants (DRI): Don't Worry--Someday People Will Have To Eat Again

Darden Restaurants (DRI), the operator of Olive Garden, Red Lobster, and other restaurants, preannounced a dismal quarter yesterday. The stock cratered, and now RBC analyst Larry Miller is sure it has bottomed.

But don’t confuse the stock bottom with an actual bottoming in awful restaurant traffic and sales. Miller’s banking on a “trough” valuation (famous last words).

As with restaurants in general, sales visibility for DRI is low for the foreseeable future. However, we think DRI’s revised earnings targets are realistic to conservative with the low end representing a worsening of the sales trend.

Admittedly, there are few near-term catalysts. But we think further downside is limited as the shares are trading at trough EPS with a trough multiple — 10x our revised F09 EPS and 5.3x F09 EV/EBITDA, or a 30% discount to its casual dining peers and a 25% discount to the low end of its historical P/E multiple range.

We’d be buyers of the shares with a 12-month horizon as we think there are potential catalysts in a conservative forecast, greater than expected cost synergies, easier same store sales comparisons, and earnings leverage if sales improve. Darden’s two brands — Olive Garden and Red Lobster — consistently rank highest on “restaurants I’d like to go to when I have more money” in our consumer polling.

So when the economy comes back, no worries. (And when, pray tell, will that be?)

RBC reiterates OUTPERFORM on Darden Restaurants (DRI), target $40.

See Also:
Darden Restaurants (DRI) Still A Buy, Even Though Consumers Aren’t Eating At Restaurants Anymore

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