Darden Restaurants (DRI), based in Orlando, is a leading U.S. restaurant operator; the buy-rated stock has a a market cap of $20.7 billion, notes John Staszak, an analyst with Argus Research — a leading independent Wall Street research firm.

The company operates more than 1,500 restaurants in the United States and Canada under the Olive Garden, Bahama Breeze, Seasons 52, Capital Grille, LongHorn Steakhouse, Eddie V’s and Yard House brand names.

Darden showed strong improvement in fiscal 1Q22 and management expects further progress over the remainder of FY22, with projected EBITDA of $1.54-$1.60 billion and EPS of $7.25-$7.60.

We think this guidance is achievable as the company has now reopened more than 90% of its restaurant dining rooms, and continues to benefit from efforts to expand takeout and delivery orders and simplify its menu. We also expect Darden to continue its record of positive earnings surprises.

Darden showed strong improvement in 1Q22. On September 23, Darden reported 1Q22 adjusted EPS of $1.76, up from $0.56 in the prior-year period and $0.12 ahead of consensus. The earnings beat was due in part to better-than-expected same-store sales.

Helped by strong same-store sales and an additional 34 stores, total sales rose 51% to $2.31 billion, above the consensus estimate of $2.24 billion.

In FY22, Darden expects to add 35-40 restaurants and to invest $375-$425 million in capital projects. It projects revenue of $9.4-$9.6 billion. Based on DRI’s efforts to expand takeout and delivery orders, we are raising our FY22 EPS estimate to $7.80 from $7.60 and our FY23 estimate to $8.80 from $8.70.

Given prospects for improving same-store sales and earnings, we think that DRI shares are undervalued at 20-times our revised EPS estimate for FY22, below the midpoint of the five-year historical range of 15-27.

Our new target price of $178 implies a multiple of 23-times our FY22 estimate, in the upper half of the historical range, and a potential return of 15% including the dividend.

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