Simply, Darden Restaurants Inc. (NYSE: DRI) will be a restaurant sector survivor, following the sector's restructuring amid the 'frugal consumer' trend, and that's why I'm Reiterating my Buy rating for DRI, first recommended on June 25, 2009 at a price of $32.78. Darden's stock has meandered since the June, and its slight downtrend, combined with difficultly remaining above the key 50-day moving average, in normal times would have prompted a re-evaluation of the June Buy rating.
But we're not in normal times. In fact, if the current 'frugal consumer' trend endures, we've entered a 'new normal' era of only modest U.S. GDP growth in the years ahead.
If the latter is the case, Darden, operator of the Olive Garden and Red Lobster casual dining restaurant chains and other restaurants, is well-positioned to attract those scare consumer dollars. Darden has done a good job taking a defensive stance during the recession (increasing its store base by only about 3%, no significant menu price increases, good cost control), and those facts, combined with a slight increase in restaurant traffic in FY2010, places the company's shares in the reasonable price category with a P/E of about 13. The First Call FY2010/FY2011 EPS estimates for DRI are $2.76 to $3.06.
Stock Analysis: Darden Restaurants Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in DRI now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your DRI position before December 2009. Sell/Stop Loss if you were to buy shares in this company: $21.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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