Bernstein: Buy The Dip In Darden Restaurants

Darden Restaurants, Inc. DRI reported fiscal third-quarter results in late March in which revenue and same-store sales at its restaurant chains fell short of expectations. The corresponding sell-off in the stock should be seen as a buying opportunity for investors, according to Bernstein.

The Analyst

Bernstein's Sara Senatore upgraded Darden Restaurants' stock rating from Market-Perform to Outperform with a price target lifted from $99 to $105.

The Thesis

Darden's Olive Garden restaurant brand accounts for 55 percent of the company's total EBIT, and investor concerns of share loss appear to be "overly pessimistic," Senatore said in the upgrade note. (See the analyst's track record here.) 

While the restaurant did see a decline in comps in fiscal 2012-2015, this was "exceptional," as the brand's performance outpaced the industry in 49 of the past 63 quarters, the analyst said. 

Darden's stock valuation reverted back to a level last seen in 2010-2012, when its operating performance was "substantially weaker," Senatore said. Looking forward, the company is well-positioned for longer-term margin expansion, she said.

Encouragingly, most of the margin expansion will come from sources outside of Olive Garden, according to Bernstein.

Darden's management deserves credit for minimizing SGA costs while maintaining its focus on operational excellence, Senatore said. 

Given the company's encouraging outlook, the analyst's EPS estimate of $5.53 in fiscal 2019 and $6.22 in fiscal 2020 are above the consensus estimates of $5.41 and $5.99, respectively.

Price Action

Shares of Darden Restaurants were trading higher by nearly 1 percent Friday morning.

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