The stock of Darden Restaurants (NYSE:DRI, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $140.55 per share and the market cap of $18.4 billion, Darden Restaurants stock shows every sign of being significantly overvalued. GF Value for Darden Restaurants is shown in the chart below.
Because Darden Restaurants is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 3.8% over the past three years and is estimated to grow 2.86% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Darden Restaurants has a cash-to-debt ratio of 0.20, which ranks in the middle range of the companies in Restaurants industry. Based on this, GuruFocus ranks Darden Restaurants's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Darden Restaurants over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Darden Restaurants has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $6.2 billion and loss of $1.87 a share. Its operating margin is 2.04%, which ranks better than 67% of the companies in Restaurants industry. Overall, GuruFocus ranks the profitability of Darden Restaurants at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Darden Restaurants over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Darden Restaurants is 3.8%, which ranks better than 75% of the companies in Restaurants industry. The 3-year average EBITDA growth is -34.8%, which ranks worse than 87% of the companies in Restaurants industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Darden Restaurants's return on invested capital is 0.80, and its cost of capital is 9.87. The historical ROIC vs WACC comparison of Darden Restaurants is shown below:
In closing, the stock of Darden Restaurants (NYSE:DRI, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 87% of the companies in Restaurants industry. To learn more about Darden Restaurants stock, you can check out its 30-year Financials here.
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