Is Darden A Good Stock to Buy?

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Darden Restaurants’ (NYSE: DRI) stock price rose 4% on Sept. 21 as the company announced earnings of $0.85 per share for the first quarter of its fiscal year. Darden’s best known restaurant brands are Olive Garden, Red Lobster, LongHorn Steakhouse, and the Capital Grille; in total, it owns about 2,000 various restaurants.

In the first quarter of last year Darden had posted $0.78 in EPS, so it has seen a 9% increase over the last year. The reported number also narrowly beat analyst expectations, as the Street’s consensus had been for $0.86 per share. Revenue for the quarter was also up, though same-store sales were slightly down. Darden announced that it plans to continue driving revenue growth by opening new locations, as it expects to increase restaurant count by 110 this year (about 5%).

Darden Restaurants makes for an interesting stock pick in terms of both value and income. The dividend yield is 3.2%, and with a $7.4 billion market cap the company trades at 16 times trailing earnings. Sell-side analysts expect earnings per share for the current fiscal year to be at $3.84, which would imply a current-year P/E multiple of 15 (and note that with the recent earnings beat Darden is slightly ahead of schedule on meeting this target). The company has a beta of 0.7, which is lower than might be expected for a sit-down restaurant; combined with its dividend, Darden makes for a good defensive pick as well.

However, hedge funds didn’t consider Darden to be a good buy during the second quarter. The largest long position we recorded in our database of 13F filings belonged to Adage Capital Management, which reported owning about 180,000 shares of the company. Adage is managed by Phil Gross and Robert Atchinson, who formerly worked at Harvard Management. Cliff Asness’s AQR Capital Management was somewhat bullish on the stock, increasing its stake by 69% to about 120,000 shares, but this position still represented only a small piece of AQR’s portfolio.

Hedge funds tend to prefer investments in quick service restaurants, as you can see in our list of the most popular restaurant stocks among hedge funds for the second quarter. Quick service restaurants have more growth opportunities (particularly internationally) and are less dependent on the broader economy, but tend to carry high earnings multiples compared to full-service restaurants; note that Darden’s trailing P/E of 16 is lower than that of any stock on the list we linked above.

Fellow full-service restaurants include Cracker Barrel (NASDAQ: CBRL), Cheesecake Factory (NASDAQ: CAKE), Chili’s parent Brinker International (NYSE: EAT), and Applebee’s owner DineEquity (NYSE: DIN). Darden ends up square in the middle of these peers in terms of trailing earnings multiples: Cracker Barrel and DineEquity are lower at 15 times and 11 times respectively, while Brinker and Cheesecake Factory’s trailing P/Es are 19 and 20. All four of these companies saw significant increases in earnings last quarter compared to a year ago, and all except for DineEquity saw increases in revenue as well. DineEquity is also the lone restaurant among the four (five including Darden itself) which is expected to see lower earnings next year than on a trailing basis, so we would probably avoid it despite its low multiple.

Choosing between the remaining restaurants is tough- Cheesecake Factory has a somewhat higher multiple, but it has an attractive brand and good growth opportunities. We think that in general the full-service restaurants make for interesting value opportunities compared to quick service restaurants. Darden and its cheaper peer Cracker Barrel would be two ways to play this investment thesis.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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