The U.S. restaurant sector certainly has taken it on the chin as a result of the recession, which has shifted Americans into "frugal consumer" mode.
In general, analysts are understandably bearish on the sector, and so am I, but there are exceptions, and Darden Restaurants (NYSE: DRI) is one. Darden's shares have pulled-back $10 recently to roughly $33 and that sets up a decent entry point. Here's why:
Darden has done a good job taking a defensive stance in the recession (by increasing its store base by only about 3%, having no significant menu price increases, and keeping good cost control), and those facts, combined with roughly flat traffic, places the company's shares in the reasonable risk category. A modest P/E of about 14 also doesn't hurt. The First Call FY2009/FY2010 EPS estimates for DRI are $2.91 to $3.18.
Other positives: Among other offerings, Darden has two well-known casual dining brands in Olive Garden and Red Lobster, and although the latter has been around for ages, the Olive Garden brand has that broad-appeal that's likely to survive the difficult 5-year period ahead of scarce consumer dollars, as the U.S. economy recovers from the recession. Olive Garden will also benefit from traffic transfer, as various local restaurants and chains close in these difficult economic conditions.
Stock Analysis: Darden is a moderate-risk stock. Consider buying a 25% position in DRI now; then buy another 25% in four months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your DRI position before October 2009. Sell/Stop Loss if you were to buy shares in this company: $21.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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