Darden Restaurants (DRI) is one of the best-managed casual dining companies in our coverage group, asserts John Staszak, an analyst with Argus Research, a leading independent Wall Street research firm.

Based in Orlando, Darden 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.

Our long-term rating on Darden remains "buy", as we believe that share buybacks, unit expansion, and further cost reductions will lead to EPS growth over time.

The company’s fiscal 1Q23 earnings matched expectations and management expects earnings growth in FY23. Its current FY23 guidance calls for revenue of $10.2-$10.4 billion and EPS of $7.40-$8.00.

In the 4Q22 press release, the company raised its quarterly dividend to $1.21 per share from $1.10. The current annualized payout is $4.84 for a yield of about 3.8%. Our dividend estimates are $4.68 for FY23 and $5.10 for FY24.

We expect Darden to exceed this guidance as it 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. We note that DRI has topped consensus estimates in 20 of the previous 23 quarters.

Given prospects for improving same-store sales and earnings, we think that DRI shares are undervalued at 14.6-times our FY23 EPS estimate, at the bottom of the five-year historical range of 13-27. Our revised target price of $144 implies a multiple of 16.4-times our FY23 estimate, still near the bottom of the historical range, and a potential return of 16% including the dividend.

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