When You’re Here, You’re Family. Darden Restaurants – DRI
Darden Restaurants [NYSE:DRI] June 8, 2008 price: $32.16
52-week range: $20.89 (Jan. 17, 2008) - $47.60 (Jun. 18, 2007)
Dividend = $0.18 quarterly = 2.24% current yield
Darden is the world’s largest casual dining operator with FY 2008 sales [ended May 31] of about $6.6 billion. They are the parent company of the Olive Garden, Red Lobster, LongHorn and Bugaboo Creek Steakhouses and Capital Grille concepts.
Despite the slowing economy, Darden likely finished FY 2008 with all-time record revenues, cash flow, EPS, dividends and book value per share. In fact, all the metrics just mentioned have risen in each of the past 10 years. Value Line rates DRI a 95th percentile for ‘earnings predictability’ [with 100 being highest] and an ‘A’ for financial strength.
Long-term holders have nothing to complain about even at present levels. From its 1998 low of $7.80 DRI have risen by 312% plus dividends.
Take a look at their per share numbers as reported by Value Line:
(FY 2008 includes Q4 estimate)
FY ……...… Sales …….. C/F ..….... EPS ….. Dividend…..Avg. P/E
2008 …... $48.40 ……$5.05 ….. $2.74 …….$0.72 …….12.1x
2007 …... $39.37 ……$4.08 ….. $2.53 …….$0.59 …….15.8x
2006 …... $38.92 ……$3.81 ….. $2.16 …….$0.43 …….16.6x
2005 ….…$34.19 ……$3.26 ….. $1.78 …….$0.24 …….14.4x
2004 .……$31.58 ……$2.94 ….. $1.50 …….$0.08 …….14.1x
2003 .……$28.22 ……$2.57 ….. $1.31 …….$0.07 …….16.2x
2002 ….…$25.38 ……$2.34 ….. $1.29 …….$0.05 …….17.3x
Darden shares have been beaten up badly this year due to the general market turmoil and fears of recessionary declines in customer traffic. So far though, DRI’s numbers still look very good and their valuation has almost never been as cheap as it is today.
At today’s quote of $32.16 Darden trades at < 11.8 times trailing and under 10.8 times forward estimates. Their 10-year median P/E has been 16x and today’s current yield of 2.24% is double to triple their historical normal.
How have Darden shareholders done in similar sell-offs from the past? In March of 2000 the shares bottomed at a [split adjusted] $8.30 and 10.4x trailing earnings. Two years later they hit $29.80. DRI shares sold off again in February 2003 to $16.50 and 12.7x trailing EPS. Over the next three years Darden shares gained 169% to $44.40.
A rebound to even fourteen times the FY 2009 estimate of $3.00 leads to a target price of $42. That’s up 30.6% plus dividends for a projected 12-month total return of almost 33%.
Is that $42 goal realistic? Darden shares actually traded as high as $44.40 and $47.60 in 2006 and 2007 respectively when fundamentals were not as favorable as they are currently.
Disclosure: Author owns shares of Darden Restaurants
************************************************************************
If you like the idea of Darden but want a relatively low-risk option combination here’s one to consider:
……………………………………........……….cash outlay………..…….cash inflow
Buy 1000 DRI @ $32.16 ……………….….$32,160
Sell 10 DRI Jan. $35 Calls @ $3.20 …………………………….……… $3,200
Sell 10 DRI Jan. $30 Puts @ $3.40 ……………………………………. $3,400
Net Cash Out-of-Pocket …………….……..$25,560
If Darden shares are $35 or above on January 19, 2009 [the option expiration date]
(a gain of 8.9% from the starting date):
Your shares will be called [sold] for $35,000.
Your $30 puts will expire worthless [a good thing for you as a seller].
You will have received two dividends totaling $360.
You will have no shares and no option obligations.
You will have $35,360 in cash.
That’s a $9,800 net profit on a cash outlay of $25,560 or + 38.3% for a trade of under 7 1/2 months. That’s on shares that only had to gain 8.8% or better.
What if the shares are absolutely unchanged on expiration date?
Your $35 Calls and $30 Puts will both expire worthless.
You will still own 1000 shares worth $32,160.
You will have collected $360 in dividends.
You’ll have $32,520 in value for your original $25,560 outlay.
That’s a 27.2% total return in less than 7 ½ months on shares that did not go up.
What’s the risk?
Break-even on the shares you bought is $32.16 less the $3.20 call premium = $28.96.
Break-even on the puts is the $30 strike price less the $3.40 put premium = $26.60.
The net break-even on the whole position is $27.78 /share or 13.6% under your starting price.
The worst case scenario is that you’d end up with 2000 shares of Darden at a net cost of $27.78 /share. At that price DRI would be < 9.3x forward earnings and yielding 2.59%.
I’d be very content to hold those Darden shares at that extremely low valuation.
Darden Restaurants [NYSE:DRI] June 8, 2008 price: $32.16
52-week range: $20.89 (Jan. 17, 2008) - $47.60 (Jun. 18, 2007)
Dividend = $0.18 quarterly = 2.24% current yield
Darden is the world’s largest casual dining operator with FY 2008 sales [ended May 31] of about $6.6 billion. They are the parent company of the Olive Garden, Red Lobster, LongHorn and Bugaboo Creek Steakhouses and Capital Grille concepts.
Despite the slowing economy, Darden likely finished FY 2008 with all-time record revenues, cash flow, EPS, dividends and book value per share. In fact, all the metrics just mentioned have risen in each of the past 10 years. Value Line rates DRI a 95th percentile for ‘earnings predictability’ [with 100 being highest] and an ‘A’ for financial strength.
Long-term holders have nothing to complain about even at present levels. From its 1998 low of $7.80 DRI have risen by 312% plus dividends.
Take a look at their per share numbers as reported by Value Line:
(FY 2008 includes Q4 estimate)
FY ……...… Sales …….. C/F ..….... EPS ….. Dividend…..Avg. P/E
2008 …... $48.40 ……$5.05 ….. $2.74 …….$0.72 …….12.1x
2007 …... $39.37 ……$4.08 ….. $2.53 …….$0.59 …….15.8x
2006 …... $38.92 ……$3.81 ….. $2.16 …….$0.43 …….16.6x
2005 ….…$34.19 ……$3.26 ….. $1.78 …….$0.24 …….14.4x
2004 .……$31.58 ……$2.94 ….. $1.50 …….$0.08 …….14.1x
2003 .……$28.22 ……$2.57 ….. $1.31 …….$0.07 …….16.2x
2002 ….…$25.38 ……$2.34 ….. $1.29 …….$0.05 …….17.3x
Darden shares have been beaten up badly this year due to the general market turmoil and fears of recessionary declines in customer traffic. So far though, DRI’s numbers still look very good and their valuation has almost never been as cheap as it is today.
At today’s quote of $32.16 Darden trades at < 11.8 times trailing and under 10.8 times forward estimates. Their 10-year median P/E has been 16x and today’s current yield of 2.24% is double to triple their historical normal.
How have Darden shareholders done in similar sell-offs from the past? In March of 2000 the shares bottomed at a [split adjusted] $8.30 and 10.4x trailing earnings. Two years later they hit $29.80. DRI shares sold off again in February 2003 to $16.50 and 12.7x trailing EPS. Over the next three years Darden shares gained 169% to $44.40.
A rebound to even fourteen times the FY 2009 estimate of $3.00 leads to a target price of $42. That’s up 30.6% plus dividends for a projected 12-month total return of almost 33%.
Is that $42 goal realistic? Darden shares actually traded as high as $44.40 and $47.60 in 2006 and 2007 respectively when fundamentals were not as favorable as they are currently.
Disclosure: Author owns shares of Darden Restaurants
************************************************************************
If you like the idea of Darden but want a relatively low-risk option combination here’s one to consider:
……………………………………........……….cash outlay………..…….cash inflow
Buy 1000 DRI @ $32.16 ……………….….$32,160
Sell 10 DRI Jan. $35 Calls @ $3.20 …………………………….……… $3,200
Sell 10 DRI Jan. $30 Puts @ $3.40 ……………………………………. $3,400
Net Cash Out-of-Pocket …………….……..$25,560
If Darden shares are $35 or above on January 19, 2009 [the option expiration date]
(a gain of 8.9% from the starting date):
Your shares will be called [sold] for $35,000.
Your $30 puts will expire worthless [a good thing for you as a seller].
You will have received two dividends totaling $360.
You will have no shares and no option obligations.
You will have $35,360 in cash.
That’s a $9,800 net profit on a cash outlay of $25,560 or + 38.3% for a trade of under 7 1/2 months. That’s on shares that only had to gain 8.8% or better.
What if the shares are absolutely unchanged on expiration date?
Your $35 Calls and $30 Puts will both expire worthless.
You will still own 1000 shares worth $32,160.
You will have collected $360 in dividends.
You’ll have $32,520 in value for your original $25,560 outlay.
That’s a 27.2% total return in less than 7 ½ months on shares that did not go up.
What’s the risk?
Break-even on the shares you bought is $32.16 less the $3.20 call premium = $28.96.
Break-even on the puts is the $30 strike price less the $3.40 put premium = $26.60.
The net break-even on the whole position is $27.78 /share or 13.6% under your starting price.
The worst case scenario is that you’d end up with 2000 shares of Darden at a net cost of $27.78 /share. At that price DRI would be < 9.3x forward earnings and yielding 2.59%.
I’d be very content to hold those Darden shares at that extremely low valuation.
