Too Low a Multiple: Darden Restaurants
In 1968, Bill Darden opened the first Red Lobster, which eventually grew into Darden Restaurants (DRI), a pioneer in casual dining and conglomerate of 1,380 + restaurants in the US.General Mills spun it off in 1995 and since then, DRI has been on a tear.
The company behind Olive Garden and Red Lobster has had a series of strong quarters, hiked its dividend, and even fine-tuned its image by donating heaps of money towards the hurricane cleanup efforts.
The Olive Garden segment, in particular, is really catching on with a loyal customer base that appreciates a balance of price, selection, and service.
We like Darden for two reasons.
One: Darden, unlike some other restaurants with portfolios of broadly appealing brands, doesn't allow new restaurant openings/themes to cannibalize sales at established restaurants.
If you recall, cannibalized sales are what put Krispy Kreme (KKD) in the morgue.
The other reason we like Darden is because 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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