Restaurants Stocks

Darden Restaurants Inc. Analysis – September 2015 Update $DRI

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Darden Restaurants Inc. (DRI) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Darden Restaurants, Inc. is a full service restaurant company. The Company owns and operates more than 1,500 restaurants. The Company’s restaurant brands include Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s Prime Seafood, Wildfish Seafood Grill and Yard House. Through subsidiaries, the Company owns and operates all of its restaurants in the United States and Canada, except for three restaurants located in Florida and three restaurants in California, which are owned jointly by the Company and third parties, and managed by the Company, seven franchised restaurants in Puerto Rico and one Atlanta, Georgia airport location.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of DRI – September 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $9,064,004,130 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.05 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 62.90% Pass
6. Moderate PEmg Ratio PEmg < 20 19.86 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.70 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.05 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 23.19 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

DRI value Chart September 2015

EPSmg $3.56
MG Growth Estimate 1.77%
MG Value $42.85
Opinion Overvalued
MG Value based on 3% Growth $51.63
MG Value based on 0% Growth $30.27
Market Implied Growth Rate 5.68%
Current Price $70.72
% of Intrinsic Value 165.03%

Darden Restaurants Inc. does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, and the high PB ratio.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.19 in 2012 to an estimated $3.56 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 5.68% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Darden Restaurants Inc. (DRI)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

DRI Charts September 2015

EPSmg $3.56
MG Growth Estimate 1.77%
MG Value $42.85
Opinion Overvalued
MG Value based on 3% Growth $51.63
MG Value based on 0% Growth $30.27
Market Implied Growth Rate 5.68%
Current Price $70.72
% of Intrinsic Value 165.03%

 

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Most Recent Balance Sheet Figures

Total Current Assets $1,204,600,000
Total Current Liabilities $1,142,600,000
Long-Term Debt $1,437,600,000
Total Assets $6,026,500,000
Intangible Assets $1,447,000,000
Total Liabilities $3,602,400,000
Shares Outstanding (Diluted Average) 126,670,000

Earnings Per Share History

Next Fiscal Year Estimate $3.05
May15 $5.47
May14 $2.15
May13 $3.13
May12 $3.57
May11 $3.39
May10 $2.84
May09 $2.65
May08 $2.55
May07 $1.35
May06 $2.16
May05 $1.78
May04 $1.36
May03 $1.31
May02 $1.30
May01 $1.06
May00 $0.89
May99 $0.66
May98 $0.45
May97 -$0.39
May96 $0.31

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.56
May15 $3.72
May14 $2.91
May13 $3.23
May12 $3.19
May11 $2.85
May10 $2.49
May09 $2.24
May08 $1.97
May07 $1.65
May06 $1.73
May05 $1.46
May04 $1.26
May03 $1.16
May02 $1.01
May01 $0.76
May00 $0.53

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – October 2014
17 Companies in the Spotlight This Week – 9/27/2014
Darden Restaurants Inc. Annual Valuation – 2014 $DRI

Other ModernGraham posts about related companies

Chipotle Mexican Grill Inc. Analysis – August 2015 Update $CMG
Chipolte Mexican Grill Inc. Quarterly Valuation – May 2015 $CMG
Yum! Brands Inc. Annual Valuation – 2015 $YUM
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Chipotle Mexican Grill Inc. Quarterly Valuation – February 2015 $CMG
McDonald’s Corporation Annual Valuation – 2014 $MCD
Chipotle Mexican Grill Inc. Quarterly Valuation – October 2014 $CMG
Darden Restaurants Inc. Annual Valuation – 2014 $DRI
Yum! Brands Inc. Annual Valuation – 2015 $YUM
Starbucks Corporation Annual Valuation – 2015 $SBUX

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to read our full disclaimer.

 

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