Why This Popular Restaurant Could Be a Wise Investment

Why This Popular Restaurant Could Be a Wise Investment image 250613 PC clarkPopular Restaurant Could Be a Wise InvestmentRed Lobster and Olive Garden are popular restaurants, but that doesn’t seem to be enough for Darden Restaurants (DRI). The parent company just can’t seem to grow its earnings from these brands.

Darden actually reported decent revenue growth in its fourth fiscal quarter of 2013, based largely on the strengths of its less well-known brands, but earnings continued to disappoint.

Darden also owns LongHorn Steakhouse, The Capital Grille, Eddie V’s Prime Seafood, Seasons 52, Yard House, and Bahama Breeze. It’s the largest full-service restaurant business in the world with more than 2,100 locations.

Total sales from continuing operations grew 11.3% to $2.3 billion. U.S. same-restaurant sales grew 3.5% for LongHorn Steakhouse, 3.2% for Red Lobster, and 1.1% for Olive Garden.

Fourth-quarter diluted net earnings per share from continuing operations were $1.01, a decrease of 12% from $1.15 per diluted share in the fourth quarter of 2012. Net earnings from continuing operations were $133.3 million, down from $151.6 million.

For fiscal year 2014, the company expects total sales growth to be between six and eight percent. Earnings will be affected by the acquisition of 40 Yard House restaurants, with diluted net earnings per share forecast to be down three to five percent compared to fiscal 2013.

Overall, the company’s top-line growth is still good, and its stock market valuation is fair.

Darden’s company stock chart is featured below:

Why This Popular Restaurant Could Be a Wise Investment image Darden Restaurants ChartDarden Restaurants Chart

Chart courtesy of www.StockCharts.com

Darden actually increased its quarterly dividend by 10% in an attempt to keep shareholders happy with minimal earnings growth. The stock is now yielding close to four percent, which is attractive.

Before Darden’s recent earnings release, Wall Street analysts were boosting their estimates. Still, the earnings growth outlook isn’t particularly strong enough to make the stock a buy right now. It’s likely the position will be a valuation play for the next couple of quarters.

Restaurant stocks have been generally stronger over the last several years. Even established brands with less health-conscious menus have done well, and those offering dividends have been reliable.

For most equity market portfolios, it makes sense to consider restaurant stocks. For some investors, more than one restaurant stock could be considered; like pairing a mature dividend-paying chain firm and an up-and-coming company.

As I have said before, restaurants are susceptible to the business cycle, but they are among the first to make a comeback when consumer spending improves. (See “How Peter Lynch Got It Right 20 Years Ago.”)

With meaningful revenue growth, investors will reward a growing restaurant company with a high valuation. Wall Street forgives operating losses in this group if the concept has proven to be successful and a company is expanding into new markets.

I wouldn’t say that Darden is struggling; its brands have real staying power. However, the problem for this mature chain is earnings growth and consistency.

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