Bad investments come in all kinds, but good investments tend to have common characteristics. Investing isn't an exact science but the best equity investments are often in companies that are well run and feature brands that have staying power in up and down cycles.
Darden Restaurants (DRI) has consistently outperformed the broader indexes and most companies in the casual restaurant sector that are competitors. Darden's business is built around several restaurant chains. Olive Garden is the company's biggest restaurant chain, but the company's also features Texas Longhorn,Capital Grille, and the Bahama Breeze.
Darden is one of the best run restaurant companies in the US and the share price has had a particularly great run over the last 5 years.
Darden's management team has also shown an impressive commitment to consistently returning cash to shareholders. The dividend has been raised from $.55 a quarter in 2015 to $.75 a quarter in 2019, and the dividend has gone up every year during this 5 year span as well.
The best measure of success in the restaurant industry is same store comparisons, or the measure of traffic that restaurant chains are generating on a year-to-year or quarter-to-quarter basis. Obviously margins are also important because discounting can be used to inflat same store sales growth in the short-term, but strong margins and strong same growth over the long-term are the best indicators of good overall strength in this industry.
Darden's most recent earnings report showed the continued trend of beating estimates with strong same store sales growth and rising revenues. Darden reported a 4.3% in year-to-year revenues at Olive Garden and the Capital Grille, and a 3.8% increase in revenues at the Longhorn Steakhouse. Management also said these revenue increases were primarily from market share gains. Darden raised its outlook for 2019 earnings per share to $5.76 to $5.80 per share, and raising yearly sales growth estimates to 5.5%.
Darden continues to innovate and market aggressively, and the company recently successfully changed the menu at olive garden to drive further market share gains. Darden is very well positioned at the high and middle end of the casual dining sector because of the company's strong and diversified restaurant portfolio and the company continues to grow impressively by taking market share and opening new stores. Olive Garden offers more affordable dining options to middle and lower income consumers, well Longhorn offers slightly more expensive dining options to higher end consumers. Capital Grille has good room for growth as a chain that is smaller than Olive Garden. Darden is well positioned for growth in good and bad economic times, and the company has performed well in different parts of the market cycle over the last decade.
Darden currently trades at $117 a share after a small a sell-off on fears of rising labor costs after Texas Roadhouse (TXRH) recently reported disappointing earnings. However, Texas Roadhouse's rising labor costs look like a specific problem for them, not an industry wide problem, since they recently opened a number of new stores. A big part of Texas Roadhouse's rising labor costs were increased store traffic too.
If you look at Darden's ability to maintain impressive comps in good times and bad, as well as the company's strong balance sheet and impressive cash flow, the stock looks undervalued. Analysts are projecting earnings per share of $6.47 in 2020 and the Darden has consistently beat what have been conservative estimates for the company's earnings growth. If Darden can earn between $6.50-7.00 a share in 2020, the company will likely trade 20-22x those earnings, or at around $140 a share. Since Darden has consistently shown the ability to take market share with strong marketing and new store openings, $6.50-7.00 earnings per share next year seems more than attainable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.