Restaurants Stocks

Darden Restaurants Inc. Annual Valuation – 2014 $DRI

220px-Darden_logo.svgBenjamin 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 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – September 2014.  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 specific look at how Darden Restaurants (DRI) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Darden Restaurants, Inc. is 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 and Yard House. In July 2014, Golden Gate Capital acquired the Red Lobster business and certain other related assets.
DRI Chart

DRI data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price $50.47
MG Value $7.88
MG Opinion Overvalued
Value Based on 3% Growth $35.15
Value Based on 0% Growth $20.60
Market Implied Growth Rate 6.16%
Net Current Asset Value (NCAV) -$22.43
PEmg 20.82
Current Ratio 1.22
PB Ratio 3.10

Balance Sheet – 5/25/2014

Current Assets $1,976,400,000
Current Liabilities $1,618,500,000
Total Debt $2,533,400,000
Total Assets $7,100,700,000
Intangible Assets $1,447,100,000
Total Liabilities $4,943,800,000
Outstanding Shares 132,300,000

Earnings Per Share

2015 (estimate) $2.17
2014 $1.38
2013 $3.14
2012 $3.58
2011 $3.41
2010 $2.86
2009 $2.65
2008 $2.55
2007 $2.53
2006 $2.16
2005 $1.78

Earnings Per Share – ModernGraham

2015 (estimate) $2.42
2014 $2.66
2013 $3.24
2012 $3.20
2011 $2.94
2010 $2.65

Dividend History
DRI Dividend Chart

DRI Dividend data by YCharts


Darden Restaurants does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, the lack of earnings growth over the last ten years, and the poor PEmg and PB ratios.  Likewise, the Enterprising Investor is concerned with the high level of debt relative to the current assets as well as the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  From purely a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $2.94 in 2011 to an estimated of $2.42 in 2015.  This demonstrated drop in earnings leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well 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 (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.

Disclaimer:  The author did not hold a position in Darden Restaurants (DRI) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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