Eric Cota's  Instablog

Current Price: ~ $52/share
Yield: ~ 3.43%

With a portfolio of almost 1,800 locations, Darden Restaurants is among the leading casual dining restaurant companies in North America. Olive Garden (710 units) and Red Lobster (692) are the firm's flagship chains, while more emergent concepts include Bahama Breeze (24) and Seasons 52 (9). The August 2007 acquisition of RARE Hospitality added LongHorn Steakhouse (326) and The Capital Grille (40) to Darden's portfolio.

Estimated WACC for the firm today is 7.36% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

(click to enlarge)

Average Annual Growth FCF: ~ 18%

CAGR FCF: ~ 4%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year

Consensus Forecast Company 5-Year Growth: ~ 12% per year

Internal Growth Rate: ~ 4.5%

Sustainable Growth Rate: ~ 15%

Scenario 1
Average FCF (2012, 2011, 2010) is $311 million

• Start at $311 million FCF
• Assume a 5-year growth rate in FCF of 12% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

The firm's future free cash flows, discounted at a WACC of 7.36%, give a present value for the entire firm (Debt + Equity) of $7620 million. If the firm's fair value of debt is estimated at $1806 million, then the fair value of the firm's equity could be $5814 million. $5814 million / 129 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 6% per year, then 3% growth in FCF per year forever:

Discounted Cash Flow Valuation

• Present Value of the entire firm (Debt + Equity): $8598 million
• Value of Equity: $6792 million or $53/share
• 20% margin of safety is $42/share

Sources

Morningstar.com

Yahoo! Finance

Darden.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.