Friday, December 16, 2005

Darden Smashes Estimates: DRI

Call us arrogant, call us pompous, but don't say we can't pick stocks.

On Monday we put out a strong buy on Darden restaurants, which smashed earnings this morning.

Darden beat by 0.04 and guided higher. In addition, Friedman Billings (which we've labeled a takeover target for 2006-2007) upgraded the stock up to market perform from underperform.

Shares of Darden (DRI) are en fuego, up 12% since our recommendation just 4 days ago.

Our thesis hasn't changed in the least.

Darden -- a pioneer in casual dining and conglomerate of 1,380 restaurants (including our favorite, Red Lobster) -- is catching on with a loyal customer base that appreciates a balance of price, selection, and service.

Its shares, anyway you look at them, are awfully cheap. On a price/book, price/earnings, price/cash flow, price/sales, and PEG basis, Darden's valuation lags that of both its industry and the S&P.

Take Darden's price/earnings multiple, for instance.

The casual dining industry trades at 24 X forward earnings. Darden trades at 18 X projected EPS . Let's be conservative: If Darden trades up to even 20 X earnings-- we have a $40 stock (Darden is expected to earn $2 next year), which sounds reasonable to us.

We expect that investors will wake up to such valuation anomalies and give Darden the multiple(s) it deserves.

Darden's sales per restaurant continue to lead this hypercompetitive $63 billion industry.

Whatever you think of the food, shares look tasty.

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