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When You’re Here, You’re Family. Darden Restaurants – DRI

June 09, 2008 | About:
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.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.5/5 (15 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Darden Restaurants(DRI) 2008 EPS estimates raised at UBS to $2.75 from $2.73. Maintains buy rating and $39 price target
mungerite
Mungerite - 6 years ago
In the name of fairness the author recommended this in December http://www.gurufocus.com/forum/read.php?2,19561
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Darden swings to profit, hikes dividend

By Matt Andrejczak

Last update: 5:33 p.m. EDT June 24, 2008

Darden Restaurants Inc. (DRI:Darden Restaurants, Inc

DRI 31.60, +0.95, (+3.1%) late Tuesday reported it swung to a fiscal fourth-quarter profit of $102 million, or 71 cents a share, which includes discontinued operations. It lost $55.1 million, or 38 cents a share, a year ago.

Sales rose 25% to $1.8 billion, helped by growth at its Olive Garden restaurant. Orlando, Fla.-based Darden also operates Red Lobster, LongHorn Steakhouse and other restaurants.

Looking ahead, Darden pegged sales growth for fiscal 2009 between 14% and 15%. It also increased its quarterly dividend to 20 cents a share, from 18 cents
mungerite
Mungerite - 6 years ago
Doc again kudos on this stock doing well its only down 10% from when you first recommended it http://www.gurufocus.com/forum/read.php?2,1956

one question: Knowing the country was facing a downturn with all the subprime problems last fall do you wish that you would have "ONLY bought" DRI and Cracker Barrell that cater to more of a middle class consumerwhich have not been hammered as bad as CAKE RT and RUTH which cater more to high end consumers and are down 30-55% since first recommended?

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Mungerite/Billy

I notice JNJ is trading $5/share lower today than it did at its peak in 2005.

Don't you wish you'd waited 5 years to buy your big position instead of having 'dead money' all this time?

Isn't KO about $25 less now than it traded back in 1999?
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Billy,

Why didn't you tell us you liked KFT way higher one year ago? People might think you actually 'knew' the company instead of thinking you were a year and many dollars early.


Do u think Warren Buffett likes Kraft

Posted by: billytickets: Date: Jun 18, 2007 7:45pm


read this article Kraft gains on Buffett talk

Call option activity soars on speculation that Berkshire Hathaway chief is interested in the food firm.

May 31 2007: 7:37 PM EDT


CHICAGO (Reuters) -- Call option activity in Kraft Foods Inc. surged Thursday on speculation that Warren Buffett's Berkshire Hathaway Inc. is interested in the largest U.S. food company.

"There are rumors circulating this week that ... Berkshire Hathaway may be building a stake in food-maker Kraft Foods," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. "We're unsure of the foundation of this rumor."

The Buffett mystery

Shares of Kraft (Charts), known for brands including Maxwell House, Nabisco and Oscar Mayer, trade at about 18.7 times next year's estimated earnings. They edged up Thursday to close at $33.84 on the New York Stock Exchange.
mungerite
Mungerite - 6 years ago
Doc like many of your untimely stock picks you are "mistaken again"

In the same thread you "reference" read this exchange

Posted by: musto: Date: Jun 18, 2007 8:09pm


billy,

as a longtime owner of MO, what do you think about Kraft?

From a strictly P/E valuation point of it seems not very cheap.

Is there something deeper than that?

They have an incredible group of brands.

Kraft Macarroni and Cheese anyone?


My answer:

Re: Do u think Warren Buffett likes Kraft

Posted by: billytickets: Date: Jun 18, 2007 8:25pm


Musto you are CORRECT I would not buy Kraft at these levels. As you know i got my Kraft in the spinoff and Kraft was a HUGE reason i bought MO in 2000-2002. However as along time shareholder.( I bought my first shares in 1993 but most between 200o-2002)I will say that Altria always "seemed' afraid to be as aggressive as possible when it came to acquisitions and "growing" the business. Altria IMO bought the food companies to"take focus off" all the tobacco money the company was bringing in. My advice for investors is to watch this stock under Rosenfeld and develop a"feel" for it. I will give you my feedback as well but the company is certainly not cheap IF IT is run the way it was when MO owned it. This company however could be a 'sleeping giant" and it would not shock me WEB grabbed some of this post spin off. He owned a big position in General Foods which Phillip Morris ( now Altria) bought from him in the mid 1980's. Just my 2 ecnts.peace

I "watched" it and gave the word to buy it at 30.40 or 30.60 in August of 2007 said it was overvalued at 33.87 in June and said it wouldnt shock me if WEB actually bought some post spin off. The reader can"judge" the accuracy of my words for themselves

Please do not"distort" my record as a stockpicker , you need to "answer" for your own picks like SLM KEM RT RUTH AIG UNH CAKE CFC YSCW MER LM Chicos CTAS LIZ etc
mungerite
Mungerite - 6 years ago
Now I know why Danielw got so"tired" correcting you doc.lol

Doc why was me suggesting KFT at 30.40 in August"foolish" but you posted this last week A ‘Cheesy’ Options Combination for Buffett Lovers.

Posted by: stockdocx99 (IP Logged)

Date: June 16, 2008 01:18PM


A ‘Cheesy’ Options Combination for Buffett Lovers.

They are lots of Buffett fanatics here that think Kraft shares are due for a nice rally. At today’s price of $30.14 that’s certainly not a crazy proposition.

Here’s a very low risk play [for KFT believers] from now through December 19, 2008:

…………………………………….….....................……Cash Outlay………..Cash Inflow

Buy 500 KFT @ $30.14 ………….............……….. $15,070

Sell 5 KFT Dec. $32.50 Calls @ $0.95 ……............……………………… $475

Sell 5 KFT Dec. $32.50 Puts @ $3.50 …………………..........………… $1,750

Net Cash Outlay …………………...............……….. $12,845

If Kraft shares are > $32.50 [+ 7.8% from your starting cost]

on expiration date (Dec. 19, 2008):

Your shares will be called (sold) for $16,250.

You will have collected three quarterly dividends totaling $405 [if the calls were not exercised early].

Your puts will expire worthless [a good thing for you as a seller].

You will have no shares, no option obligations and $16,655 cash.

That’s a net profit of $3,810 on a cash outlay of $12,845 or + 29.6% in just over 6 months.

That occurs as long as KFT has risen to at least $32.50 by December 19th.

Risk?

Break-even on the shares is $30.14 less the $0.95 call premium = $29.19.

Break-even on the puts is the $32.50 strike less the $3.50 put premium = $29.00.

Worst case you’ll own 1000 shares of Kraft at a net cost of $29.10 /share.

At that price KFT would yield 3.71% and have a P/E of < 15 on 2008 estimates of $1.95.

Doc you did say that buying this at 30.10 was not a crazy proposition right?????????

mungerite
Mungerite - 6 years ago
Doc just for the record I recommended JNJ on here during the summer of 2007 between the price 60-62

I never owned KO in my life but have started"watching" it recently

This is from July 16,2007 this can be found on the thread One Inch bar

The goal of every value investor is to find the combination of growth dividend HIgh ROE and low PE and "stability". In short a one inch bar. when a stock does make it "past my filters" I try and make as long of alist as possible of why i want to own it here is alist of JNJ

Well obviously i like JNJ for the next 12 months. Jim cramer and a close friend of mine who works for company BOTH became Bearish in the last 2 months or so. BILLYTICKETS LAW STATE: When 2 people who should be VERY BULLISH BECOME BEARISH THE TIDE IS READY TO REVERSE.

I look for the "worst" scenario vs the"best" and see if the risk is worth the reward

JNJ has not been under 55 dollars at the end of amonth since October of 2004 which is almost 3 years ago.Since then the dividend has increased 55% and the net income has increased 35% and the stock pricehas increased less than 12%

Jnj gets more than 65% of their revenues from outside the US and will benefit from a weaker dollar

AVG PE has been 23.67 over the past 10 years. with alow of 16.6 and ahigh of 31.6.with earnings forecasted for between 3.51 and 4.05 in 2007 you see the range is at the lowest 58.266 and the highest at 127.98.Certainly you can see that the you are buying the stock at the low part of its projected range

ROE has been between 24.3 and 30.1% in the past 10 years

Dividend Yield has been between 1.2 and 2.3% with an average of 1.6 over the past 10 years. JNJ dividend with NO raise is 1.66$ for 2007 .Expected historical range should be 72.173-138 at year end. Again you can see that you are buying the stock CHEAP

The stock also have a "floor" because WEB has put in 3 billion ( half in 1st quarter of 2007) and has another 30 billion avaialable "if needed" The company has an approved 10 billion dollar buy back already in place

Lets look at valueline rating on safety the stock has had its highest rating for almost 17 years now,Price stability and Eranings predictibility rating is also a perfect a 100

This company incraesed their net income 29.4% in the past 2 years and last years "bad year" they increased it from 10.4 to ONLY 11 billion. And their earnings predicbility again is 100 which is as good as it gets.

Because Billytickets is CRAZY he has put EVERY dollar AVAILABLE for investment in 2007 into this stock at price between 60-62 dollars. With WEB and his 30+ billion cache of CASH ready to buy on ANY dips and JNJ 's 5 billion dollar buyback in place .SHORT SELLERS will soon "GROW TIRED" and have to search for "weaker prey". This stock's AVERAGE PE over teh past 10 years is 23.67 and has spent only 1 year UNDER 18. At 18 times 2006's earnings of 3.76 the stock should be at 67.68 a 9.1% premium over Todays stock price .Add in the 2.7% dividend and you have a 11.8% return based on a 18 PE and LAST YEARS earnings.Ask your self one question before buying

Is it reasonable that acompany with 11 billion dollars of PROFIT a ROE of between 24-30% and the with MANY solid BRAND NAMES and VARIED STREAMS OF INCOME and a company buy back and the GREATEST INVESTOR withl 30+ BILLION behind him should grow its income over the next 5 years?


Now in the last 11 months my selection of JNJ has made over10% with dividends where the dow has dropped almost 15% in that same time span an various stockpickers who will remain nameless have recommended stocks that have taken 40-99% haircuts

in that same time span

I report you decide .peace

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