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Trout Cabbage Pasta - Darden Restaurants, Inc.

January 30, 2010 | About:

They own Red Lobster, Olive Garden, Longhorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52. In fiscal 2009 they had sales in excess of $7 billion, an almost 10% increase over fiscal 2008, and earned over $4 per share. They are Darden Restaurants, Inc. (NYSE:DRI).


Financial information contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending May 31, 2009, as filed with the Securities and Exchange Commission on July 24, 2009, and as amended on November 11, 2009.

Short-Term Investment

Based on a recent close of $35.93, there is an approximate 15% upside to first resistance as compared to an approximate 5% downside to first support. While we are not traders, based on the trading range that the stock has been in over the past nine months, a short-term trade with very tight stops may not be a bad play at this point.

Long-Term Investment

We believe that a reasonable value estimate for the stock is in the $64 range, and would add the stock to our portfolio at something less than $21. Why the large margin of safety?

At issue for us is the company's current ratio at 0.5, the company's quick ratio at 0.09, and the company's cash ratio at 0.06. In addition, we note that almost 20% of the company's total assets consist of goodwill and intangibles, and that the company's total debt is just above $1.8 billion. Not very impressive.

Another of the factors considered in determining and entry point for this stock is what we consider management ineptitude. During fiscal 2009 for every dollar management approved for debt reduction, they approved $4.35 to buy back company stock. We think such decisions show extremely poor fiduciary judgement on the part of management.

Considering that the company's net operating income before taxes was just above 11%, we simply don't see how management intends to address the company's debt, debt that was reduced by slightly more than 1% year over year.

Lastly, we note that the company ended fiscal 2009 with an equity value of $23.26, tangible book value of $4.51, and shareholder equity of $11.44, all of which tend to reinforce our need for a large margin of safety.

So while we may enjoy spending a few bucks in the restaurants the company owns, we think an investment in the stock of the company at current price levels will only lead to dysentery.


For the Wax Ink Darden Restaurants worksheet, please click here.

About the author:

Wax Ink is a baseline equity research company not licensed or registered with any government agency

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