Darden Restaurants Inc. (NYSE:DRI)’s stock price rose 4% on September 21st as the company announced 85 cents per share of earnings for the quarter ending in August 2012, the first quarter of its fiscal year. Darden’s best known restaurant brands are Olive Garden, Red Lobster, LongHorn Steakhouse, and the Capital Grille; in total, it owns about 2,000 locations. In the first quarter of last year Darden had posted 78 cents in EPS, so it has seen a 9% increase over the last year. The reported number also narrowly beat analyst expectations, as the Street’s consensus had been for 83 cents per share. Revenue for the quarter was also up, though same-store sales were slightly down. Darden announced that it plans to continue driving revenue growth by opening new locations, as it expects to increase restaurant count by 110 this year (about 5%).
Darden Restaurants, Inc. makes for an interesting stock pick in terms of both value and income. The dividend yield is 3.2% and at a $7.4 billion market cap, it trades at 16 times trailing earnings. Sell-side analysts expect earnings per share for the current fiscal year to be at $3.84, which would imply a current-year P/E multiple of 15 (and note that with the earnings beat Darden is slightly ahead of schedule on meeting this target). The beta of 0.7 is lower than might be expected for a sit-down restaurant, and combined with its dividend Darden makes for a good defensive pick as well.
However, hedge funds didn’t consider Darden Restaurants, Inc. to be a good buy during the second quarter. The largest long position we recorded in our database of 13F filings belonged to Adage Capital Management, which reported owning about 180,000 shares of the company. Adage is managed by Phil Gross and Robert Atchinson, who formerly worked at Harvard Management (find other stocks that Adage owned at the end of June). Cliff Asness’s AQR Capital Management was somewhat bullish on the stock, increasing its stake by 69% to about 120,000 shares, but this position still represented only a small piece of AQR’s portfolio (see Cliff Asness’s recent stock picks). Hedge funds tend to be preferring investments in quick service restaurants- see our list of the most popular restaurant stocks among hedge funds for the second quarter for examples. Quick service restaurants have more growth opportunities (particularly internationally) and are less dependent on the broader economy, but tend to carry high earnings multiples compared to full-service restaurants; note that Darden’s trailing P/E of 16 is lower than that of any stock on the previous list.
Fellow public full-service restaurants include Cracker Barrel Old Country Store Inc. (NASDAQ:CBRL), The Cheesecake Factory Incorporated (NASDAQ:CAKE), Chili’s parent Brinker International Inc. (NYSE:EAT), and Applebee’s owner DineEquity Inc (NYSE:DIN). Darden ends up square in the middle of these peers in terms of trailing earnings multiples: Cracker Barrel and DineEquity are lower at 15 times and 11 times respectively, while Brinker and Cheesecake Factory’s trailing P/Es are 19 and 20. All four of these companies saw significant increases in earnings last quarter compared to a year ago, and all except for DineEquity saw increases in revenue as well. DineEquity is also the lone restaurant among the four (five including Darden itself) which is expected to see lower earnings next year than on a trailing basis, so we would probably avoid it despite its low multiple. Choosing between the remaining restaurant stocks is tough- Cheesecake Factory has a somewhat higher multiple, but it has an attractive brand and good growth opportunities. We think that in general the full-service restaurants make for interesting value opportunities compared to quick service restaurants. Darden and the cheap Cracker Barrel would be two ways to play this investment thesis.
