Stephens: Assessing The Sum Of The Parts At Darden Restaurants

In a report issued Thursday, Stephens analyst Will Slabaugh and associate Billy Sherril assessed Darden Restaurants, Inc.’s DRI valuation using the sum of the parts method.

On a run-rate basis, the analysts couldn’t find meaningful upside from Darden’s stock price. The stock price and valuation recently hit an all-time high, therefore deserving an Equal-Weight rating. Slabaugh and Sherril set a $58 price target (up from the previous $50), when the stock traded close to $61.

Shares traded recently at $61.73, up 1.6 percent.

In order to outperform from the current levels, the analysts “believe that there needs to be a material turnaround at Olive Garden combined with a cost savings opportunity of $50 million-$100 million.” While they think “the interim management team has clearer goals to improve the sales trajectory at OG,” they are waiting for “a more sustained recovery” before becoming positive on the stock.

In the report, Stephens’ analysts point out a few key points for Darden Restaurants:

• Estimates: They are maintaining their FY15 adjusted EPS estimate of $2.30 and raising their FY16 adjusted EPS estimate to $2.60 (from $2.55) on lower G&A.
• Olive Garden: Their OG SSS growth assumptions for FY15 and FY16 are +0.7 percent and +1.5 percent, respectively.
• Sum-of-the-Parts Analysis: After analyzing each of the company’s concepts, the analysts "believe the current market value of DRI is fair (if not generous), assuming little changes in operations. However, should mgmt. turn around OG sales, we would expect meaningful margin expansion at DRI, considering that, by our math, OG makes up over 60% of the Company’s EBITDA."
• Modest Lift In Fair Value From a Sale-Leaseback: The fair value derived from the sum-of-the-parts analysis comes in at $57.46; “assuming a sale-leaseback on the remaining 586 DRI real estate properties grosses $2.1 billion and nets $1.3 billion,” the analysts “believe that—after paying rent at an assumed 4% of sales—the fair value would lift only modestly to $59.60.”
• Cost Savings Provide Larger Impact: “We have also made assumptions that the Company could cut between $50 mil. And $100 mil. in corporate costs by FY16. If we assume the total is $50 mil., the resulting fair value estimate rises to $61.32 per share. Assuming $100 mil. in cost savings gets us to $65.17. We would point out that each of these cost savings scenarios does not include the $2.14 per share benefit derived from the sale-leaseback scenario mentioned above.”