Chipotle Mexican Grill, Inc. (CMG), Darden Restaurants, Inc. (DRI): BlackRock Says Avoid Restaurants

That said, none of this occurred while the company was public. There are added costs and headaches that public companies face that could make life a bit more complicated and expensive for management. Opening more stores will probably more than make up for that, but investors shouldn’t fall in love with a concept stock sporting a PE of over 200 using pro-forma numbers.

Feeling it

On the other hand, investors might want to consider Darden Restaurants, Inc. (NYSE:DRI). The company’s shares have a PE of around 16 and yield about 4.5%. The shares are up from about $45 at the start of the year, but have basically been trading sideways for the last couple of years as its Olive Garden nameplate has struggled to keep sales up.

That’s one of two big concepts for the company and is an important performance driver. As long as Olive Garden and/or Red Lobster post weak results, Darden Restaurants, Inc. (NYSE:DRI) will struggle. Management, however, is aware of the problem and taking action.

For example, it has been more aggressive on the promotional front and has been willing to sacrifice near-term margins to maintain market share. That margin compression rightly has investors worried. However, the company also has a collection of growing brands, including Longhorn Steakhouse and the Capital Grille. So it is using its big brands to fund expansion via smaller, faster-growing concepts.

Although Darden Restaurants, Inc. (NYSE:DRI) is hardly a value stock, income investors looking for a restaurant play would do well to take a look. Note, too, that the dividend was just increased 10%.

Caution is Needed

Chipotle Mexican Grill, Inc. (NYSE:CMG) and Noodles are hot concepts, but investors need to be wary of a turn in investor attitudes and corporate performance. That said, both could continue to head higher over the near term if sales hold up. Darden Restaurants, Inc. (NYSE:DRI), on the other hand, has already disappointed Wall Street. Income investors who believe it can get sales heading consistently higher at its core brands will be paid well to wait for a performance turnaround.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article BlackRock Says Avoid Restaurants originally appeared on Fool.com is written by Reuben Brewer.

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