Dollars, Dining and Darden

09/21/2018 5:00 am EST

Focus: CONSUMER

John Staszak

Securities Analyst: Consumer Discretionary & Consumer Staples, Argus Research Corporation

Darden Restaurants (DRI), based in Orlando, is a leading U.S. restaurant operator, earning a buy rating from John Staszak, 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 has a market cap of $14.8 billion and is generally regarded as a mid-cap growth company. We believe its initiatives to price aggressively, lower costs and increase customer traffic at Olive Garden are transferable, and may be used to boost results at its specialty brand restaurants.

For all of FY18, revenue increased 12.7% to $8.08 billion on a comparable-calendar basis. The higher revenue was driven by “everyday-value” pricing and menu simplification.

Reflecting $235 million in share repurchases and a 2.3% increase in same store sales, adjusted EPS rose 19.7% to $4.81. Management had projected FY18 earnings of $4.75-$4.80 per share.

We note that DRI has topped earnings estimates for the past six quarters. We are raising our FY19 EPS estimate to $5.75 from $5.70 and our FY20 estimate to $6.35 from $6.30. Our long-term earnings growth rate forecast is 11%.

The company’s long history of dividend hikes and share buybacks should also continue to attract growth-income investors.

Our long-term rating on Darden remains a "buy", as we believe that share buybacks, unit expansion, and further cost reductions will lead to EPS growth over time. We also believe that Darden remains one of the best-managed casual dining companies in our coverage group.

Given prospects for stronger comp growth at the company’s core and specialty restaurant chains, we believe that DRI shares are undervalued at 20.7-times our revised FY19 EPS estimate. Our new target price is $140. At current prices, our target, if achieved, offers investors the prospect of a 20% total return.

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