Darden Restaurants' Valuation Has Outrun Its Fundamentals; Deutsche Bank Lowers Rating To Hold

Deutsche Bank downgraded Darden Restaurants, Inc. DRI to Hold, saying optimism has likely outpaced the company’s fundamentals.

“We still believe in DRI’s operational improvements and strategic approach, but with shares are up 16 percent vs. S&P 500’s 6 percent gain (since the election), we view them as fully valued,” said the German bank.

With the company set to release its second-quarter earnings on December 20, it will be an opportunity to provide some color on recent post-election trends and thoughts into calendar 2017.

“With few changes to industry-wide fundamentals near-term, we are still cautious and believe the recent share price run up has been based more on a potential turn than fundamentals,” added Deutsche Bank.

The bank was still impressed with Darden’s strategy, however, and still considers it among the top of the class in dining. The restaurant industry has been performing against a difficult backdrop, providing little optimism on a macro level.

'We Could Be Wrong'

It seems that Deutsche Bank is not exactly sold on lowering Darden’s rating, however, as it discussed areas where it may be wrong on the downgrade:

1. On the top line: "[O]ur below cons est. may prove light as DRI is taking market share and has posted positive blended SSS over the last nine quarters."
2. Margins: "[A]fter seeing ~100–200bps lower COGS in each of the last five quarters, management's cautious language may prove conservative."
3. Valuation: "[I]nvestors appear to be looking past the current fundamentals in favor of potential economic growth in 2017 and multiple expansion."

Deutsche Bank left its $76 price target on Darden unchanged.At last check, shares of Darden were down 0.98 percent at $75.02.